InfraCom: Attractive acquisition opportunities but cautious outlook
Research Update
2024-05-10
07:00
Analyst Q&A
Closed
Rasmus Jacobsson answered 4 questions.
InfraCom’s Q1 2024 report was mixed with net sales below Redeye Research estimates (RRe), while better gross margin led to EBITDA in line with RRe. While the subscription-based business remains resilient, a tougher macro environment has hurt InfraCom’s transactional businesses. However, potential acquisitions are becoming more attractive, which InfraCom has a solid balance sheet to capitalize on. Redeye reduces its estimates and fair value range based on a cautious outlook.
RJ
FR
Rasmus Jacobsson
Fredrik Reuterhäll
Contents
Acquisitions
QSI Sweden
Centiljon
Estimates
Quarterly estimates
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Net Sales came in at SEK199m, 87% y/y, but below our estimated SEK 221m (deviation -10%). The sales increase is primarily due to the Connect acquisition, consolidated in Q2 2023. The deviation is due to a tougher macro environment and InfraCom’s customers taking longer to make investment decisions. While this does not impact InfraCom’s core subscription business, it has negatively affected its more transaction-heavy businesses that were recently acquired. This also resulted in a SEK12m revaluation gain from the Connect earn-out, as Connect is progressing below earn-out targets. A stronger gross margin led to EBITDA being in line with RRe.
InfraCom has made three acquisitions thus far that will consolidate during 2024 with a combined sales volume of SEK114.6m (SEK11.0m will be eliminated on consolidation). In the Q1 2024 report, InfraCom states acquisitions are becoming more attractive, suggesting more acquisitions are on the card for the year. InfraCom has a Net debt/LTM EBITDA of 0.9x. The balance sheet supports a higher acquisition cadence with debt covenants of net debt/EBITDA below 2.5x, 30% equity ratio, and ICR above 5x. Based on the more cautious outlook for InfraCom’s transactional-based business, we have reduced our sales estimates, which has resulted in a slower EBITDA margin recovery.
Based on our revised estimates, we reduced our fair value range from SEK22-45 (base case SEK37) to SEK20-42 (base case SEK34). Our estimates suggest an EV/EBITDA of 9.5x for 2024e. This compares to InfraCom’s historical weighted average acquisition multiple of 7.0x and is slightly below its 5-year average EV/EBITDA multiple of 10.4x. Given InfraCom’s increased mix of transactional business with the Connect acquisition, we believe a somewhat lower multiple is justified. Acquisitions and earnings are catalysts for the share, while the c1.7% dividend yield provides support.
SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
Revenues | 355.3 | 729.9 | 878.0 | 927.7 | 977.4 |
Revenue Growth | 30.1% | 105% | 20.3% | 5.7% | 5.4% |
EBITDA | 81.8 | 118.0 | 125.2 | 129.1 | 140.7 |
EBIT | 68.1 | 89.9 | 90.4 | 116.1 | 127.0 |
EBIT Margin | 19.3% | 12.4% | 10.3% | 12.5% | 13.0% |
Net Income | 52.7 | 63.8 | 63.2 | 83.6 | 92.3 |
EV/Sales | 2.4 | 1.8 | 1.4 | 1.3 | 1.2 |
EV/EBIT | 12.4 | 14.2 | 13.4 | 10.2 | 9.1 |
Year-to-date, InfraCom has made two acquisitions, QSI Sweden and Centiljon.
InfraCom acquired QSi Sweden, a regional leader in IT infrastructure for the SME segment. QSi reported revenue of SEK40m and an EBIT of SEK2.7m in 2023. The acquisition was consolidated on 2 April 2024 and has a maximum purchase price of SEK22.5m, of which SEK4m is an earn-out dependent on QSi achieving an improved EBIT of SEK4m per year for fiscal years April 2024 - March 2025 and April 2025 - March 2026. Of the SEK18m purchase price, SEK7m will be paid by newly issued shares of InfraCom at SEK31.29 per share (20-day VWAP). Additionally, InfraCom will finance SEK9.25m via its existing credit framework. Based on the 2024 budget, the EV/EBITDA multiple is approximately 5.1x.
Founded in 2005, QSi employs around 20 people, specializes in Microsoft platforms, and offers services mainly based on Microsoft 365 and Azure. The company, with offices in Hässleholm, Malmö, and Kristianstad, primarily serves clients in Skåne.
Centiljon, an IT operations company founded in 2010 with six employees, specializes in hosting, fiber infrastructure, and server management. It digitizes customer operations by centralizing business systems. The purchase price is SEK14m with an earn-out of SEK3m. For the purchase price, SEK3m is financed via stock. Centiljon had sales of SEK20.6m during 2023 and an EBIT of 1.4m. The earn-out is conditional on Centiljon reaching an average EBIT of SEK2.5m on average during June 2024 – May 2025 and June 2025 – May 2026. Based on budgeted results, the transaction is done at an EV/EBITDA of 5.0x, while the EV/EBIT on 2023’s result is 10.0x (excluding the earn-out). InfraCom expects to consolidate Centiljon on 15 May 2024.
InfraCom has made three acquisitions thus far that will consolidate during 2024 (ComCenter, QSI, and Centiljon). Based on the acquisition disclosures, the combined annual sales volume of SEK114.6m, of which SEK11m will be eliminated upon consolidation. We have incorporated this into our estimates.
Based on the more cautious outlook for InfraCom’s transactional-based business, we have reduced our sales estimates, which has resulted in a slower EBITDA margin recovery.
Over the long term, we expect InfraCom to acquire an average of SEK40m in sales at an EV/EBITDA multiple of around 5.5x. We expect acquired companies to have an EBITDA margin of around 12%, which we expect InfraCom to improve towards 17% once integrated (resulting in an EBIT margin of around 15%, in line with InfraCom’s target).
We reduce our fair value range from SEK22-45 with a base case of SEK37 to SEK20-42 with a base case of SEK34. Based on our revised estimates, InfraCom is trading in line with its 5-year average. We find the EV/EBITDA multiple to be fair.
Compared to its peers, InfraCom trades at an EV/EBITDA premium while it has a slight discount on EV/EBIT, which we find fair given the different margin structures.
Case
Continued growth through consolidating the Swedish market
Evidence
A solid M&A track record with strong margins supports our view
Challenge
Commoditization
Challenge
Expensive journey in Europe
Valuation
Future acquisitions reflected in the share price
People: 4
Infracom receives a high rating in People for several reasons. First, its management has a solid track record regarding M&A and capital allocation. Second, management, and particularly CEO Bo Kjellberg, has vast experience in the industry. Third, insiders own a substantial share of Infracom. For example, CEO Bo Kjellberg owns over 50% of the Company. Fourth, we believe that management’s communication is balanced and realistic.
Business: 3
Infracom receives an average rating for Business as we identify both positive and negative characteristics in Infracom’s business model. We believe the recurring and non-cyclical revenue streams are the most important favourable characteristics. On the other hand, Infracom’s markets are highly competitive, and, in many cases, it is hard to differentiate products and services from competing ones.
Financials: 3
Infracom receives a high rating for Financials for several reasons. First, the Company has a long track record of being profitable, and its margins are among the highest in the industry. Second, Infracom has a strong financial position. To achieve an even higher rating, Infracom would need to increase its organic growth.
Income statement | |||
SEKm | 2023 | 2024e | 2025e |
Revenues | 729.9 | 878.0 | 927.7 |
Cost of Revenue | 356.0 | 437.8 | 457.9 |
Operating Expenses | 283.9 | 349.8 | 353.7 |
EBITDA | 118.0 | 125.2 | 129.1 |
Depreciation | 1.8 | 1.0 | 0.84 |
Amortizations | 26.2 | 14.8 | 12.1 |
EBIT | 89.9 | 90.4 | 116.1 |
Shares in Associates | 0.00 | 0.00 | 0.00 |
Interest Expenses | -8.4 | -12.0 | -12.0 |
Net Financial Items | -5.5 | -10.8 | -10.8 |
EBT | 84.4 | 79.6 | 105.3 |
Income Tax Expenses | 20.6 | 16.4 | 21.7 |
Net Income | 63.8 | 63.2 | 83.6 |
Balance sheet | |||
Assets | |||
Non-current assets | |||
SEKm | 2023 | 2024e | 2025e |
Property, Plant and Equipment (Net) | 12.2 | 19.9 | 28.4 |
Goodwill | 470.2 | 591.1 | 617.5 |
Intangible Assets | 6.7 | 0.73 | -2.1 |
Right-of-Use Assets | 33.9 | 33.9 | 33.9 |
Other Non-Current Assets | 1.3 | 1.3 | 1.3 |
Total Non-Current Assets | 524.4 | 647.1 | 679.0 |
Current assets | |||
SEKm | 2023 | 2024e | 2025e |
Inventories | 22.2 | 6.0 | 6.3 |
Accounts Receivable | 112.2 | 72.2 | 76.3 |
Other Current Assets | 0.00 | 36.2 | 38.2 |
Cash Equivalents | 60.6 | 57.0 | 84.5 |
Total Current Assets | 224.8 | 171.4 | 205.3 |
Total Assets | 749.2 | 818.4 | 884.3 |
Equity and Liabilities | |||
Equity | |||
SEKm | 2023 | 2024e | 2025e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 353.4 | 397.8 | 457.0 |
Non-current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Long Term Debt | 131.4 | 131.4 | 131.4 |
Long Term Lease Liabilities | 15.4 | 15.4 | 15.4 |
Other Non-Current Lease Liabilities | 34.6 | 34.6 | 34.6 |
Total Non-Current Liabilities | 196.2 | 196.2 | 196.2 |
Current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Short Term Debt | 0.00 | 0.00 | 0.00 |
Short Term Lease Liabilities | 14.5 | 14.5 | 14.5 |
Accounts Payable | 48.1 | 48.0 | 50.2 |
Other Current Liabilities | 44.6 | 161.9 | 166.4 |
Total Current Liabilities | 199.6 | 224.4 | 231.1 |
Total Liabilities and Equity | 749.2 | 818.4 | 884.3 |
Cash flow | |||
SEKm | 2023 | 2024e | 2025e |
Operating Cash Flow | 101.6 | 153.6 | 96.9 |
Investing Cash Flow | -90.0 | -138.5 | -45.0 |
Financing Cash Flow | 8.4 | -18.7 | -24.5 |
Disclosures and disclaimers
Contents
Acquisitions
QSI Sweden
Centiljon
Estimates
Quarterly estimates
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article