This week I added Hexatronic Group to my portfolio. Compared to the portfolio Hexatronic is a mature company. Net revenue is 891 MSEK, profits of 42 MSEK, and an EBIDTA-margin of 9,1 % (latest full year report). Hexatronic is in the same industry as Waystream, as I added to the portfolio two weeks ago. The difference is that Hexatronic delivers the passive parts, fibre optic cables, duct, splice boxes etc.. Waystream delivers the active parts of fibre network (routers etc.). The two companies therefore complement each other rather than being competitors. Hexatronic is listed at small cap on Nasdaq Stockholm.
Products and markets
The Hexatronic Group consists of 13 companies (8 in Sweden, 1 in Norway, 1 in UK, 1 in China, 1 in USA, and 1 in New Zealand). The main market is the Nordic countries (70 % of sales). Second largest is New Zealand (10 %). Both acquisitions and organic growth drives the high growth of the group. In 2016, there were 3 acquisitions but none in 2017 so far. The picture above shows the production site in Hudiksvall 300 km north of Stockholm.
Costumers are telecom operators, datacom industry and network owners. Selling goes through wholesalers. In general, building fibre networks is the topic in many countries, and it will stay a high-growth market for many years. All of EU and many other countries have goals for digitalisation, which requires a large amount of fibre cables. Building the 5G network requires even more cables as there are far more access points due to lower range.
At the same time, there is a strong pull effect.
Households demand fast internet in order to watch Netflix or get the best out of the Apple TV. Shortly Internet of Things will add to this demand for fast internet. In my own household, my 15 year-old twins certainly appreciate the fibre connections when they play League of Legends (and watches YouTube and listens to Spotify at the same time, as teenagers do). Hexatronic is therefor in an industry with a high growth potential in the coming years.
Hexatronic’s home market in the Nordic countries are ahead of markets as the German or the UK market in terms of bringing fibre to private homes (called the FTTH-market). The same goes for the US market where Hexatronic established itself during 2015 as they did in on the UK market in 2016. This gives the company a valuable track record.
My guess is that one of the next acquisitions will be in Germany. The company’s strategy to enter a market is to acquire local companies already established on that market rather than make a green field start.
Hexatronic are in midst of changing their reporting to calendar year. The next report therefor will be Q4 (November 15th) and from 2018 the reporting then will follow the calendar year.
The company grows fast. Numbers speak for themselves as growth in net revenue during the last period were Q1 +50 %, Q2 +51 %, and Q3 +26 %. By the end of Q3 orders were 92 % higher YtY – this partly offset by a worldwide shortage on raw materials to produce fibre cables, though. Net revenue in 2016 (reconstructed) were 1,032 MSEK.
Margins are improving as well. By end of Q3, margins were 11.3 % (rolling 12 months). At the time of the 2015/16 report, it was 9.1 %.
Profits in 2016 (reconstructed) were 54.1 MSEK and earning per share 1.5 SEK (after dilution). After first half of 2017, profits were 39.9 MSEK and earning per share 1.06 SEK.
Cash flow during the first half of 2017 was -26.9 MSEK. Investments in a new production line (- 17.7 MSEK), change in working capital (-45.8 MSEK) and less borrowing (-3.6 MSEK) countered the cash flow from operating activities of 40.2 MSEK. Hexatronic builds up inventories during winter in order to deliver during the spring and summer, which might give a picture where working capital changes negatively during first half of the year and positively in the second half. The New Zealand production of course are opposite. By the end of first half of 2017, cash level was 22.5 MSEK.
To conclude this, I see a company with high growth and a growing ability to be profitable as well.
During 2017, the share price has almost doubled. By Start-January, the price was 37.5 SEK and on Friday, it closed at 70.25 SEK.
If we assume that earning per share will be 2.5 SEK (1.06 after H1) by the end of the year, then P/E with the current share price will be 28.1. This is ok, I think for company in this industry with this potential. So unless we see a large acquisition or an unexpected high growth or and dramatic rise in margins during the remainder of the year, that steps up earing per share, I assumes a moderate change (5-15 %) in share price during the remainder of 2017.
I see a number of risks. First, acquisitions are notoriously difficult. Next, the current change in exchange rate. The main production facilities are in Sweden and a weak US$ or Euro will cost on margins. Third, Hexatronic prepares for the building of fibre net in UK. Brexit could slow down the UK market for a period.
On the positive side, a lawsuit against Hexatronic for patent infringements ended last month with Hexatronic a winner. Then it is a market with global growth and there are strong push (political will to invest in IT infrastructure) and pull (consumer demand) forces.
In terms of my EGS model, Hexatronic places itself along Fortnox in the green corner (achieved market acceptance and past breakeven).