Expansion Into Germany, UK, And US Will Drive Future Fiber Demand

Key Takeaways

• Strategic expansion into low fiber optic penetration markets and subsidy programs should drive future growth in fiber solutions.
  
• Expansion in the U.S. through acquisitions and facilities enhances market position and boosts long-term revenue and margin growth.
  
• Declines in sales, investment risks, and competitive disadvantages indicate challenges in revenue growth and market position, despite strong cash flow and strategic cash conservation.

Catalysts

Develops, manufactures, markets, and sells fiber communication solutions in Sweden, Rest of Europe, North America, Asia Pacific, the United Kingdom, and internationally.

• Hexatronic's expansion into strategic growth markets like Germany, U.K., and the U.S. with low fiber optic penetration and large subsidy programs should drive future revenue growth in fiber solutions.
  
• Continued demand for fiber due to 5G deployment, increased data usage, and government initiatives is expected to boost long-term revenue and margin growth.
  
• The acquisition of Endor and new duct plant in Utah enhance Hexatronic's U.S. operations and capabilities in the Data Center market, likely supporting revenue growth and margin improvement.
  
• Planned new segment reporting for transparency and increased focus on growth areas (Fiber Solutions, Harsh Environment, Data Center) could streamline operations, improving net margins and earnings.
  
• Lower investment needs after capacity expansions in 2022 and 2023 should result in higher cash flows and potentially increased earnings as the company benefits from its existing infrastructure.

Hexatronic Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexatronic Group's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 9.6% in 3 years time.
• Analysts expect earnings to reach SEK 1.0 billion (and earnings per share of SEK 4.93) by about March 2028, up from SEK 346.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK1.1 billion in earnings, and the most bearish expecting SEK858 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the GB Electrical industry at 19.4x.
• 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 7.58%, as per the Simply Wall St company report.

Hexatronic Group Future Earnings Per Share Growth

Risks

• There is a noted decline in overall net sales by 2%, with an organic decline of 4%. This decline was attributed particularly to the Harsh Environment segment, which could indicate volatility or dependence on large, irregular orders, impacting revenue consistency.
  
• The Fiber Solutions segment faced seasonal demand fluctuations and price pressures in significant markets like Europe and North America, which could affect net margins due to lower pricing power amid softer market demand and geopolitical uncertainties.
  
• , Hexatronic's heavy recent investments could lead to increased depreciation and operating expenses, affecting net margins, especially since they have just completed an investment-intensive period.
  
• Despite a strong cash flow, the company opted not to distribute a dividend. This could imply they are conserving cash, potentially due to uncertain future earnings or to fund further infrastructure or acquisitions, which carries an execution risk.
  
• Several peers such as Corning and Clearfield have reported more significant growth figures in their U.S. broadband markets compared to Hexatronic’s flat performance, signaling a potential competitive disadvantage that could impact their ability to capture market share and drive revenue growth.

Valuation

• The analysts have a consensus price target of SEK55.0 for Hexatronic Group 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 SEK60.0, and the most bearish reporting a price target of just SEK48.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK10.5 billion, earnings will come to SEK1.0 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of SEK29.06, the analyst price target of SEK55.0 is 47.2% 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.