Thursday both Nexam Chemical and Hexatronic reported first half of 2018. Both reports disappointed me, as the growth were only modest. Both shares fell heavily on Thursday and Friday – and fell more than is justified by the weak reports.
Nexam Chemical – low growth
The report from Nexam has both good and bad. After the acquisition of Plasticolor in December turnover of MSEK 27.6 is six times higher than Q2 last year. The Y-on-Y therefor growth looks impressive, but gives a false picture. Q1 was the first quarter with the full effect of the acquisition and the turnover was MSEK 27.0. Compared to Q1 the growth of 2.2 % from Q1 to Q2 is not impressive. On the other hand, the EBIDTA has improved and amounts to MSEK -0.47. In Q1, it was MSEK -0.9.
Both in his written and oral presentation, there is something at play concerning short and long term. Short term, I think Q3 will show limited growth if any, as the CEO emphasises the shutting of plants during summer. To avoid lower sales Nexam needs sell a lot to balance their customers’ closing down plants for 2-3 weeks (out of net 12 weeks in Q3). The closing weeks amount to 17-25 % of the production time in the quarter. Probably we will see lower sales in Nexams next report.
In the longer term, the CEO emphasises the need for sufficient production capacity. Shortly after the acquisition in December, the company upgraded capacity in Sweden with a new production line. In Q2, the company ordered an extruder to the plant in Hungary. Furthermore, the CEO opened for more acquisitions in his presentation in order to secure production capacity.
Nexams cash position allows further acquisitions. After Q2 Nexam has MSEK 69 in cash to which comes possible loans.
My guess is that we will see a weak Q3 and then a strong Q4 report – and probably an acquisition within the next year.
Hexatronic – low margin
Hexatronic’s report showed a 19 % growth in Q2. Nevertheless, the report was a disappointment as the EBIDTA margin was 9.7 % (compared to 14.2 % last year). The reason for this is a weak Swedish market where the long an cold winter made it difficult to lay cables before late in spring. After this warm and sunny summer, I myself tend to forget how cold it was in March… but Hexatronic’s report reminds me.
Well, the problem in the report from Hexatronic is the margin, whereas it was the lack of growth in Nexam’s report. The long winter and the weak Swedish market hit the margin, as utilisation of the production capacity is lower. Inventories are up 38 % compared to last year, reflecting the lower sales.
The day before the report, Hexatronic announced an order of MSEK 70 in the UK. There are two things to say about this. One is that it is the first major order in UK and it is a quite large order (17 % of the total turnover in Q2). Second, that a press release the day before the report in general gives me the creeps.
Looking ahead, I think we will see a very strong report in Q3. Despite a little less activity in building fibre network in Sweden, the rate is still very high compared to other countries. Probably the constructors will compensate the delay by stepping up activity during summer. Adding to that, I expect the growth on other main markets will continue (New Zealand, US, UK and Germany).
Find an interview with the CEO after the report here (in Swedish).
Both shares took some heavy blows after the reports. Nexam fell from 9.0 to 8.26 SEK from Wednesday to Friday. This is 8 % down. Hexatronic is even worse. On Wednesday, it closed at 57.6 SEK and on Friday on 49.05 – down 15 %.
In general, Hexatronic have been in a downtrend since the beginning of 2018. This is strange as growth is high and the market possibilities in the fibre industry are bright. Hexatronic have been subject to a number of alleged patent infringements cases opened by a competitor, Emtelle. The repeated allegations are annoying, but after Emtelle lost the case in Sweden and dropped the case in New Zealand, their claims looks weaker and weaker. Currently there is one active case (in the UK), opened by Emtelle in June.
There is no doubt that the uncertainty regarding these cases affects the share price negatively and it would do the shareholders well, if or when Hexatronic wins them.
I think in both cases that the reactions on the reports are harsh. Especially Hexatronic is currently very cheap. Redeye has a base price of 78 SEK (bull: 119 SEK, bear: 29 SEK) in comparison (today 46.05 SEK). Probably we will see some recovery in the next weeks.