Declining FTTH Market Will Impede Performance But Unlock Recovery

Key Takeaways

• Heavy reliance on traditional FTTH markets and select North American customers leaves Hexatronic exposed to margin pressure, revenue volatility, and slower near-term growth.
  
• Limited presence in fast-growing backbone and data center segments, combined with competitive pressures and overcapacity, risks profitability despite industry tailwinds.
  
• Weakness in core fiber solutions, pricing pressure, market concentration, and shifts in industry trends threaten revenue stability, margin growth, and long-term earnings visibility.

Catalysts

Develops, manufactures, markets, and sells fiber communication solutions in Sweden, the United States, Germany, the United Kingdom, and internationally.

• While Hexatronic's exposure to growing demand for broadband connectivity and the global expansion of high-speed networks should support its long-term addressable market, the current underweight position in the rapidly growing backbone and data center interconnect segments leaves the company vulnerable to slowdowns in its traditional FTTH last-mile market, which is facing subdued growth in Europe and heightened price pressure in North America, likely capping near-term revenue upside.
  
• Although the boom in data center investment and digital infrastructure creates a secular tailwind for Hexatronic's Data Center and Harsh Environment businesses (both of which posted record quarters), the continued weak performance and margin compression in Fiber Solutions-due to overcapacity, competitiveness, and slow recovery particularly in Europe and Canada-could overshadow group profitability and delay a sustainable return to double-digit EBITA margins.
  
• While government-backed connectivity initiatives and digitalization mandates in key markets may eventually spark renewed fiber investment, the company's strong dependence on a few large customers in North America and less established relationships with Tier 1 builders increases earnings volatility and makes revenue growth reliant on factors such as customer capex priorities, permitting issues, and inventory adjustments out of Hexatronic's control.
  
• Despite the global trend of fiber overtaking copper in communications infrastructure, persistent price pressure-especially in conduit and pipes in North America where volumes are robust but prices are sharply lower year over year-threatens margin recovery, particularly as Hexatronic has not yet built a strong position in high-growth backbone markets where volumes are increasing but the company has limited share.
  
• While increased focus on margin improvement programs and cost-saving measures could enhance net margins going forward, any redeployment of savings into new growth areas carries execution risk, and the uncertain impact of alternative broadband technologies such as fixed wireless and satellite from evolving government programs means that revenue and earnings growth from fiber-specific mandates could fall short of expectations in the medium term.

Hexatronic Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hexatronic Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hexatronic Group's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.7% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach SEK 423.2 million (and earnings per share of SEK 2.06) by about August 2028, up from SEK 358.0 million today. The analysts are largely in agreement about this estimate.
• 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 14.0x on those 2028 earnings, up from 13.4x today. This future PE is lower than the current PE for the GB Electrical industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Hexatronic Group Future Earnings Per Share Growth

Risks

• Significant ongoing weakness in the Fiber Solutions segment, which constitutes approximately 65% of total sales, creates material risk to group revenues and net margins given recurring underperformance, price pressure, and challenged demand in both North America and Europe.
  
• Aggressive pricing pressure, especially in North America's conduit business, results in lower average selling prices despite healthy volumes, compressing gross margin and ultimately reducing overall group earnings.
  
• The company's reliance on a concentrated customer base in key markets such as North America exposes Hexatronic to order volatility and revenue fluctuations, as seen in recent quarters when a handful of customers materially slowed orders due to overstocking, permitting issues, or internal deleveraging.
  
• Transition risks from a saturated FTTH last-mile market (Hexatronic's historical strength), which is now maturing in Europe and facing slower growth, to backbone/transport and data center segments in which Hexatronic currently lacks significant market position, may constrain revenue growth and net profit improvement over the medium term.
  
• The ongoing shift in government stimulus (e.g., the BEAD program) and possible technology substitution by wireless and satellite broadband could structurally erode long-term demand for fiber infrastructure, threatening Hexatronic's core revenue streams and reducing long-term earnings visibility.

Valuation

• The assumed bearish price target for Hexatronic Group is SEK21.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hexatronic Group'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 SEK30.0, and the most bearish reporting a price target of just SEK21.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK8.0 billion, earnings will come to SEK423.2 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of SEK22.9, the bearish analyst price target of SEK21.5 is 6.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.