ALI's Spin-off Into NewCo Will Leverage AI And Digital Twins

Key Takeaways

• The separation of ALI into NewCo could unlock value with distinct strategies, enhancing growth profiles and boosting revenue for Hexagon.
  
• Hexagon's innovations in digital twins, combined with strong recurring revenue growth, bolster resilience and earnings potential amid industry challenges.
  
• Strategic shifts, market challenges, and regulatory variables pose risks to Hexagon's revenue growth, operational focus, and financial stability.

Catalysts

Provides geospatial and industrial enterprise solutions worldwide.

• The potential separation of the Asset Life Cycle Intelligence division (ALI) into a NewCo could unlock value by creating two public companies with distinct strategies, which may offer investors different growth profiles, potentially boosting revenue and net margins for both entities.
  
• Hexagon’s focus on building digital twins using robotics, sensors, software, and AI is critical for tackling industry challenges like labor shortages and sustainability, which is expected to drive revenue growth and improve operational efficiencies.
  
• The strong recurring revenue growth across divisions, despite short-term demand challenges, suggests that Hexagon is establishing a resilient revenue base, which could enhance earnings stability and growth.
  
• NewCo’s pure software focus with market-leading margins and recurring revenues positions it well to capitalize on infrastructure modernization and energy transition opportunities, projecting strong future revenue and earnings potential.
  
• The launch of new products and innovations, such as the ATS800 laser tracker and the AICON tool, should drive sales and margin improvements, contributing positively to Hexagon's future earnings.

Hexagon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexagon's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.7% today to 21.8% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €0.53) by about December 2027, up from €1.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 268.7x on those 2027 earnings, up from 24.7x today. This future PE is greater than the current PE for the GB Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Hexagon Future Earnings Per Share Growth

Risks

• The potential separation of Hexagon's Asset Life Cycle Intelligence (ALI) division into a new company creates uncertainty regarding the execution of this strategic shift, which may impact Hexagon's operational focus and lead to transitional costs affecting net margins.
  
• Q3 sales have organically declined by 2%, with reported growth down 4%, primarily due to muted demand in several end markets, suggesting challenges in maintaining revenue growth amidst economic uncertainties.
  
• Broad weakness persists in key markets such as construction and in China, indicating potential revenue risks for the company if these conditions do not improve.
  
• Prolonged project approval delays and customer caution in capital deployment in the ALI division pose risks to revenue cycles and could pressure earnings if these trends persist.
  
• The exploration of listing options for NewCo in the U.S. and Sweden, along with regulatory requirements, introduces variables that may delay strategic goals impacting overall financial stability and shareholder value.

Valuation

• The analysts have a consensus price target of €119.22 for Hexagon 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 €153.73, and the most bearish reporting a price target of just €89.81.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €6.5 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 268.7x, assuming you use a discount rate of 6.0%.
• Given the current share price of €106.45, the analyst's price target of €119.22 is 10.7% 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.