Sales was SEK2159m, c3% below our expectations with a growth rate of c6%. Organic growth was c-6%, acquisition driven growth c11% and currency effects contributed with c1%. Two divisions, Niche Products and International showed stronger growth than we expected. TecSec and Control, was just below our estimates. The Electrify division was the largest detractor in terms of both sales and profitability. Management comments that a few business units within the division encountered a challenging market where the early easter also had a dampening effect.

EBITA was above our estimates, driven by solid performance within Niche Products and International and also lower central costs. We note that the EBITA margins were solid in all divisions except Electrify and that the Control division improved again in the seasonally stronger fourth quarter.

The operating cash flow in the seasonally weaker fourth quarter was solid at SEK378m, showing Lagercrantz's focus on being efficient with its working capital - a key ingredient to its successful M&A strategy. The inventory levels increased a bit in relation to sales, which is normal from a seasonality perspective, and we expect Lagercrantz to drive continuous improvements in this area ahead.

The return on equity continues to be well above its target of 25% and stood at 27% on a rolling-twelve-month basis. The EBITA/Working capital is at 77% where the company target is to be above 45%. We believe that Lagercrantz will continue to be well above its EBITA/Working capital target in the future due to its large and increasing ratio of product businesses in the group, which typically have higher capital expenditures but lower working capital needs.

Lagercrantz's financial position is strong with an operating net debt of SEK2.438bn and a rolling-twelve-month EBITDA of SEK1680 leading to an operating net debt/EBITDA ratio of c1.5x. Including pension liabilities and lease liabilities the net debt/EBITDA ratio is c1.8x. This is low for Lagercrantz's business and we therefore believe the company will continue to be aggressive on the acquisition front in the coming quarters.

We note that the CEO letter breathes optimism ahead despite the fact that a few business units still meets a challenging market. The expected lower interest rate in the second half of 2024 is a factor management believes will support a stronger market.

The gross margins continues to be at strong levels which we believe is driven by the higher share of product businesses in Lagercrantz's portfolio of companies. According to its guidance it aims to increase product sales to 85% of total sales, this will come from both acquisitions and stronger organic growth in the product businesses. Lagercrantz increased this share from 75% to 76% year over year.

Lagercrantz has shown stable growth across all divisions during the last years fueled by both organic growth and growth from acquisitions. Growth from acquisitions was the main engine for growth in the quarter, a pattern we expect to continue in the coming quarters.

The Electrify division had a soft quarter with SEK449m in sales and SEK66m in EBITA. The organic growth was negative 8%. Lagercrantz mentions a challenging market for several business units in the division where the number of project deliveries were limited. Nordic Road Safety had a solid start within the group despite the cold weather in Sweden. The CEO mentioned in the conference call that the business area has always had some seasonality impacting Q4 and we note that this may have increased somewhat with the addition of Nordic Road Safety where most of the installation is done in the warmer months with a peak in Lagercrantz Q2. The cold weather also has a dampening effect on the companies supplying components to the electricity grids such as Elpress, Elkapsling (the company had a large project delivery to the UK in Q4 last year), and Cue Dee.

The Control division are back to solid levels with an EBITA margin above 20% in the quarter. The division reached sales of SEK198m and EBITA of SEK40m and the organic growth was c-2%. The third and fourth quarters are the most important quarters for Radonova, which is the largest unit in terms of EBITA for the Control division, which explains most of the seasonality in the division, and we note that it had a solid quarter (we do a deep-dive into Radonova further down in this report). Precimeter notes a continued downturn driven by the lower aluminium production in Europe. Lagercrantz mentioned that Radonova, Direktronik, Load Indicator and Leteng performed well in the quarter (same as in Q3).

TecSec had a somewhat challenging quarter with net sales of SEK518m and an EBITA of SEK85m, the EBITA margin was c16.4%, a decrease from Q4 last year of c18.4%. Notably the division met strong comparables where it showed c25% organic growth in Q4 last year. Organic growth was c-11%. PcP, ISG Nordic, ARAS, Idesco and Door & Joinery again performed particularly well while CWL and R-Con was negatively impacted by a weaker market.

The Niche products division was the brightest star in the report with a stellar EBITA margin of c22.5% vs c20.5% in Q4 last year, and the EBITA was SEK134m in the quarter up from SEK107m. Organic growth was c-1% and sales came in at SEK596m. Asept, Wapro, Tormek, SIB, Sajas, Thermod and Vendig showed strong profitability improvements and Tormek, the second largest company within Lagercrantz (after Elpress), closed its books with a new record year. The business environment is stable across the divisions according to the management team. Lagercrantz notes that the acquired companies MH Modules and Prido got good starts within the company.

The International division showed an organic growth of c-4% and reported SEK398m in sales and SEK70m in EBITA. The EBITA margin strengthened from c14.6% to c17.6%. Lagercrantz again singles out the marine businesses Libra and Tebul as particularly strong performers along with Schmitztechnik and E-tech. NST, G9 and a few of the ACTE-companies didn't reach the levels from last year. All-in-all a solid report for the International division which has established itself at a higher profitability level.

We had the pleasure of visiting the Lagercrantz’ subsidiary Radonova’s HQ in February. Radonova is the strongest business within the Control division sporting sales of close to SEK70m and EBITA of cSEK16m leading to margins of just short of c25% according to our estimates (supported by public data from allabolag.se) – to be compared with sales of cSEK745m and EBITA of cSEK118m (EBITA margins of c16%) for the division on a rolling-twelve-month basis. The history of the company spans from 1986 when the Chernobyl catastrophe triggered the need to measure radioactivity. The company Gammadata was formed from academia and was an independent company until 2009 when Landauer Inc (part of Fortive since 2017) bought the company in 2009. The current CEO Karl Nilsson joined in 2010. As often the case when being part of a large organization the company suffered from bureaucracy and lack of focus from senior management within Landauer. Lagercrantz bought the company in September 2015 – CEO Karl Nilsson recommended the sellers to sell to Lagercrantz as he had a positive experience being part of Indutrade, having a similar decentralized business model. The company was renamed to Radonova after the sale.

The main business of Radonova is the measurement of radon gas in indoor spaces, homes, and workplaces. Radioactive radon gas is the second leading cause of lung cancer after smoking. Of all measured facilities, 15% are identified by Radonova with too high radon levels. Actions to reduce the radon levels will lower the risk of lung cancer for persons occupying these areas. A good cause and suppose you want to ensure you do not have unhealthy radon levels in your home, workplace or, for example, at your children's daycare centres or schools, you can easily order a measurement via one of Radonova's local websites, for instance, in Sweden or the US.

As the biggest independent accredited radon measurement company, Radonova can provide high-quality, accurate results of radon levels, which fulfil multiple measurement standards worldwide. The core of the business is passive radon detectors, which are placed out by installers or end users. After the measurement period, the detectors are sent back to Radonova. All the measurement data is handled digitally, with a user-friendly interface on the web: Radonova´s My Pages. Users can also review their measurement reports and get enough information to proceed with actions if the radon concentration in the facility is too high.

The start of Radonova within Lagercrantz was not ideal and the company didn’t fully deliver on its financial goals the first year. After that, the company has delivered constant improvements and EBITA has grown from cSEK5m to cSEK16m. Speaking to Karl, he mentioned that he felt the pressure from Lagercrantz management to turn the business around but he also got the tools to do it. He feels great motivation being part of a larger group and getting the support he needs but also the autonomy to make the right decisions on a daily basis to reach the goals that are set jointly. Lagercrantz often talks about the friendly competition within the business units and Karl is clearly proud to have been the best performer within the Control division multiple times – a feat that he hopes to continue.

The company is a cash machine working with negative working capital - its main radon measurement products are out for 2-6 months while the company gets paid in 30 days. The market is surrounded by regulatory barriers – the products need to be certified - and Radonova is the market leader in Europe with a market share of north of 50% in several countries. There are only a few competitors and we believe the reason is that the market is too small for large competitors to make the investment to compete – just the niche characteristics that fits the serial acquirer model. Radonova mainly sells business to business and its largest customers are housing cooperations, companies, and authorities. The main driver for growth is that more and more countries adopt regulations on radon measurement and also that the countries focus on more supervision to make sure that the regulations are followed. In Sweden, buildings need to be measured once every 10 years. 

One of the key issues for the company has been digitalization. Radonova has passive detectors – meaning that the detectors are sent to the customer – placed by installers – sent back to Radonova for analysis and the result is then published digitally. The alternative is to measure radon digitally where the result is published directly from the site but the cost for that is also much higher, and while Radonova has solutions for this already, it believes the passive instruments are here to stay for the long term and that the risk for obsolescence has decreased during the last years.

Lagercrantz made one acquisition in the fourth quarter of Prido in February, and also completed the acquisition of Nordic Road Safety in March. We have commented on both in previous updates and reiterate that both acquisitions are large for Lagercrantz. Lagercrantz has completed nine acquisitions the last twelve months.

Management continues to be positive about the prospects for acquisitions in the coming quarters. Considering Lagercrantz has a good financial position and strong cash flow generation we believe it will take advantage of this situation.

Prido is based in the southwestern part of Sweden and has a history spanning from 1973. The company is a manufacturer of industrial folding doors and sells its product through intermediaries. The company is known for its Ecolid folding door of which the first version was produced in 1994 and it is still the best seller in Sweden. The main export market for the company is Norway and while Lagercrantz aims to aid the company within exports, the type of folding doors that Prido produces are not common in most countries. While Lagercrantz is confident that Prido's doors are superior and cheaper it may be difficult to change customers behavior. The company is part of Lagercrantz's Niche Products division.

Prido has a high return on working capital of well above 100% according to the press release (well above Lagercrantz return of c77% on a rolling-twelve-month basis), and is expected to generate cSEK270m in sales and an operating profit of cSEK64-68m for the year ending on the 30th of April. This leads to a strong operating margin of c25%, well above the average for Lagercrantz. Lagercrantz paid an EV/EBITA multiple of c7x, which in the mid range EBITA equals SEK462m. The company has shown strong growth in the last years as seen below.

As can be seen below, Lagercrantz has clearly ramped up its acquisition pace in recent years while paying roughly the same multiples. The company updated its guidance from 5-8 acquisitions per year to 8-12 acquisitions per year in the Q2 2023/2024 report. We believe the number of acquisitions can vary depending on the size of acquisitions.

As per below, we note that multiples are roughly at the same levels as five years ago and they have decreased in the current fiscal year. We believe the multiples can differ from year to year based on various factors and that investors should track the long term trend as an indication for a stronger or weaker ROIC ahead.

We make minor near-term revisions to out EBITA margin forecasts and our sales forecast. In the longer term, we forecast about 4% organic sales growth and a contribution from future M&A of around 8% from 2024/25 onwards. We continue to expect margins to increase slightly due to higher growth in product businesses and higher margins in (future) acquired companies. We note that the current economic climate is a risk on the downside and even if Lagercrantz is a much stronger group than it was during the last major financial crisis when sales fell 20% and the operating profit with 40% (from 2008/09-2009/10), it won’t be unaffected in a recession. We believe we have taken this risk into account in our financial estimates through a lower growth rate in 2024/2025. We have estimated a slight rebound in the latter half of 2024/2025 due to expected lower interest rates.

A negative effect that has an impact on the net profit right now is financial expenses. As Lagercrantz only has floating rate debt the increased interest rate puts pressure on the net income margin. The yearly financial expenses were SEK94m in 2022/2023 and increased to SEK142m in the current year (financial expenses were SEK45m in this quarter) and another increase to around SEK170m in 2024/2025. We have provided our short-term estimates per division and our long-term estimates for the group below.

We are raising our fair value range for Lagercrantz upon the solid Q4 report. Our fair value range is SEK140 to SEK220 per share, with a base case fair value per share of SEK180 (previously SEK120 to SEK210 with a base case of SEK150).

For this comparison, we use FactSet consensus estimates for Lagercrantz. As our own forecasts for Lagercrantz include future M&A, the comparison to peers with our forecasts is slightly misleading. Currently, Lagercrantz is trading in line with the average of its peers in 2024E according to Factset. On our forecasts, including future M&A, and at the current share price of SEK170.8, Lagercrantz is trading at c23x EV/EBITA 2024/2025E (roughly equal to 2023E in the table) and a P/E of c34. We argue that Lagercrantz is reasonably priced both in absolute terms and relative to peers.