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.

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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Sales were below expectations, but good gross margin led to EBITDA in line with RRe

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.

Attractive acquisition opportunities but cautious outlook

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.

Fair value range of SEK20-42 with a base case of SEK34

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.

Key financials

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

Acquisitions

Year-to-date, InfraCom has made two acquisitions, QSI Sweden and Centiljon.

QSI Sweden

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

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.

Estimates

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).

Quarterly estimates

Valuation

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.

Investment thesis

Case

Continued growth through consolidating the Swedish market

Considering Infracom’s solid track record of consolidating peers in the Swedish market, we believe it can continue to grow its sales by acquisitions with solid margins. We believe its M&A track record highlights management’s ability to successfully acquire and integrate companies into the group, which we argue is not fully reflected in its current valuation. As such, acquisitions alongside new UCaaS deals (with a European option) and quarterly reports serve as the primary catalysts.

Evidence

A solid M&A track record with strong margins supports our view

Infracom has become one of the most significant players in its niche, offering comprehensive IT services within the digital workplace while being one of only two Swedish players with a proprietary UCaaS solution. Since the listing in 2018, Infracom has grown its sales with a CAGR of ~21% (until 2022), mainly through acquisitions. At the same time, it has maintained strong margins, which proves management’s integration abilities and testifies to continued value creation for shareholders. Thus, we believe acquisitions will continue to drive sales growth, as we expect Infracom to add SEK30m in sales annually with maintained strong margins.

Challenge

Commoditization

Internet access, UCaaS, and IT as a service are all hard to differentiate, resulting in an increased risk of price pressure, making it difficult to achieve solid profits. However, Infracom has a track record of stable profitability with strong margins. Also, its proprietary UCaaS platform and a large share of in-house fibre infrastructure support Infracom in avoiding the most competitive market segments, with a large share of its revenues being of recurring nature.

Challenge

Expensive journey in Europe

While Infracom has a solid track record of acquiring in Sweden, going abroad would be new and riskier. However, considering the substantial growth potential for UCaaS in Europe and Infracom’s low-risk reseller/partner approaches, we believe the potential reward is worth the risk of such a European expansion.

Valuation

Future acquisitions reflected in the share price

Based on our DCF model, we see a fair value of SEK34 per share in our Base Case and SEK20 and SEK42 per share in our Bear and Bull Cases, respectively. Given management’s ability to successfully acquire and integrate companies into the group, we believe Infracom can continue to grow its sales by a continued consolidation with maintained solid margins. However, we believe the acquisition potential is reflected in the share price.

Quality Rating

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.

Financials

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

Rating definitions

The team

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Contents

Acquisitions

QSI Sweden

Centiljon

Estimates

Quarterly estimates

Valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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