Net sales in Q2 came in at SEK1391m (SEK1169m) growing c19% year over year, which was c1% above our forecast. Organic sales growth was c9% excluding FX effects.

The adjusted EBITA of SEK260m beat our forecast with c1% and was an increase from SEK231m last year. Organic EBITA growth was c1% year over year. The EBITA margin was solid at c18.7% driven by strong performance within Resource Efficiency.

The operating cash flow was strong and came in at SEK197m, leading to a cash conversion of c83% for the quarter. We expect strong cash flows for the rest of 2024 driven by working capital releases after strong organic sales growth in 2023 and so far in 2024, which we expect to continue to normalize further ahead.

The net debt position stood at SEK3992m in Q1 and decreased to SEK3904m in Q2 driven by the strong operating cash flow in the quarter. The net debt to EBITDA on a rolling twelve-month basis is c3.13x (3.32x in the last quarter). The net financial debt excluding contingent considerations was SEK2552m.

Financing costs increased, driven by increased interest rates which weighed negatively on the net income for the group. The UK tax increase from 19% to 25% that came into force on 1st of April 2023 did not impact the comparables in the quarter. While adjusted EBITA grew by 17% y/y, EPS decreased by c8% y/y - we expect improvements in the quarters to come and note that despite the decrease this was above our estimates.

Sales have increased steadily since 2018 while the gross margins are more or less flat. Sdiptech has exited its service businesses with large operating expenses and has replaced them with product businesses with low operating expenses which can be seen in the EBITA graph. Proprietary products are now making up c59% of total sales. From this quarter onwards we include a graph on free cash flow before acquisitions in per share figures as we believe this is the best proxy of value creation over time (although volatile quarter over quarter).

As seen below, both business areas have been growing steadily since 2019.

Resource Efficiency continued to meet strong comparable figures in the quarter but still grew sales and EBITA due to a mix of organic and acquired growth. Most of the business units again showed strong figures, and the segment was in-line with our estimates both on sales and EBITA. Sales increased by 15% and the organic sales growth was not disclosed but we believe it was c7%. The EBITA margin increased from 20.4% to 22%, which is a solid figure for the segment (despite a drop from 24.5% in Q1 boosted by a few high margin businesses such as Heatwork and Agrosistemi that has its high season then). The company highlights IDE which had a strong quarter with its offer of rental of temporary electric power. Also the businesses focused on electricity and energy solutions were strong performers.

Special Infrastructure Solutions beat our expectations on sales and EBITA, where several of the larger business units delivered solid organic growth. Sales increased by 29% and adjusted EBITA increased by Special Infrastructure Solutions beat our expectations on sales and EBITA, again driven by that several of the larger business units delivered solid organic growth. Sales increased by 21% and adjusted EBITA increased by 8% in the segment. While not disclosed we believe the organic sales growth was c10%. The adjusted EBITA margin was, as in Q1, again hurt by the elevator business, Metus, delivering a negative profit. Sdiptech has laid off c20% of the workforce in the company during the quarter and expects the company to return to profitability ahead. Last quarter, Castella Entreprenad was weak but seems to have improved after the restructuring. Strong development was seen within the group's business units offering attachments for forklift trucks (ELM), solutions for transport refrigeration (GAH), and road maintenance equipment (Hilltip).

Sdiptech clearly slowed-down its acquisition pace in 2023 after a few years of strong acquisition-driven growth. We think this was a prudent move by the company as interest rates have increased heavily while the share price of Sdiptech suffered, meaning it makes less sense to issue shares. The company acquired an EBITA of cSEK50m during 2023. In 2024 it has completed two acquisition of JR Industries with a combined EBITA of cSEK65m. Sdiptech has a target to acquire SEK120m to SEK150m in EBITA per year and has earlier mentioned that they expect to meet the target in 2024, but likely at the lower end - this was updated to a target of around SEK100m to SEK120m meaning the company expects to acquire additional cSEK40m in EBITA this year.

As stated before, we expect strong cash flows in 2024 that will be positive for the financial position of Sdiptech which is a key for the acquisition machine to start working in full gear ahead. On the negative front the company face expected earn-outs of cSEK200m in 2024, cSEK808m in 2025-2026, cSEK349m in 2027-2029 and SEK116m after 2029. We believe the company will generate enough cash in 2024 to be able to acquire cSEK100m in EBITA (including the already concluded transaction of JR Industries and Watertech), and keep the net debt to EBITDA ratio around current levels at c3.1x.

In this report we got the data for the acquisition multiple of the latest acquisition Watertech. We had previously assumed a multiple of 7x and the actual multiple seems to have been in that range as the EV/EBT multiple was c8x including earn-outs (c5x excluding earn-outs). We are encouraged by Sdiptech's discipline with multiples paid in the latest acquisitions.

On the back of the Q2 report we have only made minor revisions to our estimates.

Q3 & Q4 2024

2025 and onwards

We increase our Fair Value Range from SEK200 to SEK580 to SEK220 to SEK600 with a Base Case per share of SEK400, on the back of the report largely driven by a slight decrease in the interest rate environment leading to a lower WACC (from 8.28% to 8.09%).

For this comparison, we use FactSet consensus for Sdiptech. Sdiptech is trading below the median and average of its peers on 2024-2025e EV/EBITA and P/E consensus. While EV/EBITA is the common valuation metric for serial acquirers we have noted that the P/E is a better metric to grasp the underlying profit generation of these companies as net profit is a close proxy to free cash flow adding back acquisitions (the reason why we don't have that in the table is that there are no FactSet consensus for this number). As seen above Sdiptech trades at a discount of roughly 30% of the larger peers but roughly in-line with peers of similar size such as Volati.

We believe the valuation gap will shrink a bit more as we think Sdiptech will continue to show solid figures in the years to come but believe the overall valuation in the sector is at the high side.