Natural Gas Trucking Headwinds May Linger But Long-Term Decarbonization Demand Should Eventually Improve

Catalysts

About Hexagon Composites

Hexagon Composites supplies composite cylinder based fuel systems and mobile infrastructure for natural gas and other alternative fuel applications in transportation and energy markets.

What are the underlying business or industry changes driving this perspective?

• Although the U.S. Class 8 truck fleet is aging and will ultimately need replacement, prolonged freight weakness and elevated financing costs may delay new truck purchases for longer than anticipated. This could push out revenue recovery in Hexagon’s Truck segment and slow the path back to positive EBITDA.
• While natural gas remains a cost effective and widely available route to lower emissions in long haul trucking, shifting U.S. regulations and uncertainty around future emissions standards could cause fleets to postpone committing to CNG platforms. This may constrain top line growth and limit scale driven margin improvement.
• Although the X15N engine and the Pioneer leasing platform lower barriers to CNG adoption, fleets’ reluctance to take on higher upfront capital commitments in an uncertain macro environment may restrict the speed and breadth of program uptake. This could temper the expected uplift in revenue and delay earnings leverage.
• Despite structural cost reductions, tight bank covenants and the need to preserve liquidity through 2026 could restrict investment in product development and selective M&A just as demand ultimately returns. This may potentially cap revenue growth and limit net margin expansion when the cycle turns.
• While growing regulatory and customer focus on decarbonizing heavy transport and gas logistics should support long term demand for Hexagon’s systems, sustained low shale activity and weak incentive prices in renewable natural gas markets may keep Mobile Pipeline utilization and pricing under pressure. This could weigh on segment margins and group earnings.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Hexagon Composites compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hexagon Composites's revenue will grow by 27.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -23.3% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach NOK 211.0 million (and earnings per share of NOK 0.66) by about August 2029, up from -NOK 620.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NOK1.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 131.7x on those 2029 earnings, up from -7.1x today. This future PE is greater than the current PE for the GB Machinery industry at 29.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The prolonged and unprecedented downturn in the U.S. Class 8 truck market, combined with fleets delaying replacement due to weak freight rates and high capital costs, could push out the recovery far beyond management expectations, suppressing Truck segment revenue and delaying a return to positive earnings.
• Persistent macroeconomic uncertainty, together with shifting U.S. emissions regulations and tariff volatility, may keep fleets in a wait and see mode on new CNG platforms. This would slow structural adoption of natural gas vehicles and cap long term revenue growth and operating margin expansion.
• Deep cyclicality in the Mobile Pipeline business, driven by low oil and gas prices, reduced shale activity and weak renewable natural gas credit prices, could prove more structural than temporary. This would keep utilization and pricing depressed and weigh heavily on segment margins and group EBITDA.
• The need to preserve liquidity through stringent bank covenants, constrained facilities and tight minimum cash requirements could limit strategic investment, R&D and growth initiatives such as Pioneer and SES integration. This may restrict scale benefits and constrain future net margin improvement.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Hexagon Composites is NOK13.5, which represents up to two standard deviations below the consensus price target of NOK16.88. This valuation is based on what can be assumed as the expectations of Hexagon Composites's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK20.0, and the most bearish reporting a price target of just NOK13.5.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be NOK5.5 billion, earnings will come to NOK211.0 million, and it would be trading on a PE ratio of 131.7x, assuming you use a discount rate of 8.6%.
• Given the current share price of NOK13.78, the analyst price target of NOK13.5 is 2.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.