HEXPOL AB: Sustained Long Term Growth, Stable Margins, and Strategic M&A

Catalysts

• Historic Growth: HEXPOL has demonstrated robust growth over the years—expanding from modest beginnings in 2001 to achieving sales over 22 billion SEK in 2023—and its strong track record suggests that this momentum is likely to continue.
• Gross Margins: The company has maintained stable gross margins (18-23%) last five years, reflecting enduring pricing power vs customers.
• M&A Roll-Up: HEXPOL’s proactive acquisition strategy—evidenced by deals such as McCann Plastics and Star Thermoplastics—continues to expand its product portfolio and geographic reach, providing a solid platform to fuel further growth.

Assumptions

• Revenue: Based on historical trends—with a 3-year CAGR of ~8.47% and a 5-year CAGR of ~5.68%—a conservative, reasonable projection for the next five years is a revenue CAGR of about 5–9% p.a., balancing recent performance with longer-term potential. Given historical performance and the more recent downturn the upper part of the range seem like a resonable target hence growth is assumed to be 7% in the model.
• Net Profit Margin: Considering historic averages (ranging from ~11.74% to ~12.32%), it’s reasonable to expect net profit margins to stabilize around 11–12% p.a. over the coming five years, reflecting continued pricing power and operational efficiency. With the lower part being the most likely, 11% net profit margin is assumed in the model.

Risks

• Economic & Market Downturn: A continued weakening in the global economy
• Integration & Execution Risks: Challenges in successfully integrating acquisitions or realizing expected synergies could hinder the M&A roll-up strategy and affect overall growth.
• Regulatory & Environmental Risks: Changes in environmental regulations or increased compliance costs might impact margins and operational flexibility

Valuation

• Valuation (5-Year Outlook): Given the company's historical growth, stable margins, and active M&A strategy—and comparing HEXPOL’s current forward PE of 15.7x to the industry average of ~17.9x—a reasonable forecast is that the forward PE multiple will settle in the range of 17x to 18x over the next five years. This assumes that the company achieves its target revenue growth of around 7% p.a. while maintaining net margins near 11%. Ìt is assume that the company PE will be around midpoint 17.5x.
• Discount Rate: Given HEXPOL’s stable fundamentals, a base discount rate of 5.5% as suggested by Simply seems resonable. However, considering the inherent cyclicality of the polymers and chemicals industry, a 1% risk premium is added—resulting in an effective discount rate of 6.5% over the next five years.

Looking Ahead

• Revenue Growth: Upcoming quarters should ideally reflect a revenue CAGR of around 7% per annum, consistent with historical performance and our model assumptions.
• Net Profit Margin: We expect net margins to stabilize near 11% per annum, in line with historic averages and our valuation model.