Natural Gas Truck Adoption And Emissions Policy Shifts Will Drive Long Term Upside

Catalysts

About Hexagon Composites

Hexagon Composites develops and supplies composite fuel systems and mobile pipeline solutions for natural gas and other alternative fuels in transportation and energy markets.

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

• Replacement demand in the aging U.S. Class 8 truck fleet, combined with the industry ambition of 8 to 10 percent CNG penetration, positions Hexagon to capture a sharp volume upswing once freight and truck orders normalize, supporting a rebound in revenue and EBITDA.
• The X15N 15 liter natural gas engine and Hexagon's demo truck and Pioneer leasing initiatives are lowering adoption barriers for fleets, which should accelerate natural gas truck uptake and drive higher margins as volumes scale over a largely fixed cost base.
• Shifts in emissions policy away from a strict zero emission mandate toward cost effective decarbonization solutions are elevating CNG as the practical diesel replacement in heavy duty trucking, which in turn may improve Hexagon's pricing power and its long term earnings potential.
• Structural cost reductions of up to NOK 190 million annually, tight CapEx limits and targeted working capital releases are lowering the group's breakeven point. As a result, even a moderate market recovery can translate into disproportionately stronger net margins and free cash flow.
• Expansion in resilient segments such as Refuse, Transit and Aftermarket, along with the SES Composites acquisition in Europe, is broadening the customer and geographic base, smoothing cyclicality and creating a more stable revenue and EBITDA profile over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Hexagon Composites's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -48.3% today to 3.8% in 3 years time.
• Analysts expect earnings to reach NOK 228.1 million (and earnings per share of NOK 0.97) by about December 2028, up from NOK -1.8 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 28.5x on those 2028 earnings, up from -1.1x today. This future PE is greater than the current PE for the GB Machinery industry at 24.5x.
• 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 9.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The prolonged cyclical downturn in North American trucking and Mobile Pipeline, combined with continued macroeconomic uncertainty and weak freight rates, could delay the expected rebound in Class 8 truck replacements. This could suppress volumes and revenue for much longer than assumed and limit operating leverage on the lower cost base.
• Heavy reliance on natural gas as the preferred decarbonization pathway for long haul trucking may be challenged if future U.S. or European regulations shift back toward stricter zero emission targets. It could also be challenged if competing technologies such as battery electric or hydrogen regain policy or subsidy support, which would weigh on long term revenue growth and earnings potential.
• The business remains highly exposed to commodity driven segments, where low oil and gas prices and weak LCFS and RIN credit markets are already causing customers to halt CapEx and focus on asset utilization. A sustained low incentive environment for renewable natural gas could structurally cap Mobile Pipeline demand and keep segment margins and group EBITDA depressed.
• Despite the recent equity raise and covenant holiday, Hexagon still targets a leverage covenant test based on EBITDA improvement by Q3 2026. If sales do not recover as expected or mix remains unfavorable, the company may face renewed balance sheet pressure, higher financing costs or the need for further dilutive capital measures, all of which would constrain net income and free cash flow.
• Large scale cost cutting, headcount reductions of about 20 percent and strict CapEx limits through 2026 can protect liquidity in the near term but also risk underinvestment in innovation, capacity and customer support. This could erode Hexagon’s competitive position over time and cap long term revenue growth and EBITDA margin expansion.

Valuation

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

• The analysts have a consensus price target of NOK17.5 for Hexagon Composites based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK38.0, and the most bearish reporting a price target of just NOK9.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NOK6.1 billion, earnings will come to NOK228.1 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of NOK7.53, the analyst price target of NOK17.5 is 57.0% higher.
  
• 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.