Net sales in Q4 came in at SEK1335m (SEK1076m) growing c24% year over year, which was c8% above our forecast. Organic sales growth was c10% excluding FX effects.

The adjusted EBITA of SEK251m beat our forecast with c11% and an increase from SEK203m last year. Organic EBITA growth was c5% year over year. The EBITA margin was solid at c18.8% driven by strong performance within Resource Efficiency.

The operating cash flow was also solid and came in at SEK167m, leading to a cash conversion of c72% for the quarter. We expect strong cash flows for the rest of 2024 driven by working capital releases after strong organic sales growth in 2023 and Q1 2024, which we expect to continue to normalize ahead. The company also mentioned in the conference call that they have several initiatives ongoing to reduce inventory and negotiate better payment terms with customers and suppliers.

The net debt position stood at SEK3509.8m in Q4 and increased to SEK3992m in Q1, mainly due to the acquisition of JR Industries. The net debt to EBITDA on a rolling twelve-month basis is c3.32x (3.07x in the last quarter). The net financial debt excluding contingent considerations was SEK2606m.

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. While adjusted EBITA grew by 24% y/y, EPS grew by c11.5% y/y. The net debt to EBITDA ratio including contingent considerations is around 3x based on our 2024 estimates.

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. Proprietary products are now making up c59% of total sales. From this quarter onwards we include a graph on free cash flow before acquisitions in per share figures as we believe this is the best proxy of value creation over time (although volatile quarter over quarter).

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 lsales and adjusted EBITA. Sales increased by 16% and the organic sales growth was not disclosed . The EBITA margin increased from 22.7% to 24.5%, which is a strong figure for the business segment. The company highlights the operations within replacement and renovation of electricity and water meters (Hydrostandard in Sweden), rental of temporary electric power (likely Multitech Site Services & IDE Systems in the UK), and the treatment and recycling of biological sludge (Agrosistemi in Italy) as particularly strong performers.

Special Infrastructure Solutions beat our expectations on sales and EBITA, where several of the larger business units delivered solid organic growth. Sales increased by 29% and adjusted EBITA increased by 19% in the segment. The adjusted EBITA margin was, as in Q4, hurt by the exposure to new construction (most likely Castella Entreprenad and Metus). The company mentioned that they have implemented cost initiatives within the companies and expect them to become profitable again in the quarters ahead after slight negative results during the last two quarters. Strong development was seen within the group's business units offering attachments for forklift trucks (E-l-m Kragelund in Denmark), solutions for transport refrigeration (GAH Refrigeration from the UK), products and services for railway maintenance (Mecno Service in Italy) and solutions for case management of insurance claims (Auger Site Investigations in the UK) - these areas were also highlighted in Q4 and seems to be riding on a strong momentum.

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 two acquisition of JR Industries with an EBITA of cSEK60m and Watertech with an EBITA of c4.5m. Sdiptech has a target to acquire SEK120m to SEK150m in EBITA per year and has earlier mentioned that they expect to meet the target in 2024, but likely at the lower end - this was updated to a target of around SEK100m to SEK120m meaning the company expects to acquire additional SEK35m to SEK55m in EBITA during 2024.

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 acquisition machine to start working in full gear ahead. On the negative front the company face expected earn-outs of cSEK258m in 2024, cSEK791m in 2025-2026, cSEK356m in 2027-2029 and SEK116m after 2029. We believe the company will generate enough cash in 2024 to be able to acquire cSEK100 to cSEK120m in EBITA (including the already concluded transaction of JR Industries and Watertech), and still lower the net debt to EBITDA ratio to closer to c3x (now c3.3x).

Sdiptech announced the acquisition of the Swedish company Watertech on the 11th of April. On its website we read that Watertech "is an independent, owner-operated company with a firm business idea: to optimize its clients water quality with chemical and technical solutions". The company offers products and services to improve cooling water, boiler feed, process water, etc. Sdiptech is building a group of companies in the same sector but operating in different geographies with Watertech in Sweden, Kemi-tech in Denmark and and Water Treatment Products Ltd, in the UK. We believe this a good strategy from Sdiptech as it should be able to realize synergies through an optimized assortment and industry expertise. Watertech reported cSEK20m in sales and an EBITA of cSEK4.5m in 2023. The company is consolidated in business area Resource Efficiency from April 2024 and we believe Sdiptech paid c7x EV/EBITA for the acquisition.

On the back of the Q1 report we have revised our estimates as per the following:

Q2 2024

The rest of 2024 and onwards

We increase our Bear case fair value from SEK180 to SEK200 and our new fair value range is SEK200 to SEK580 (SEK180 to SEK580), with a base case fair value per share of SEK380 (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 (the reason why we don't have that in the table is that there are no FactSet consensus for this number). As seen above 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.