Despite several acquisitions, the report was weak, with sales declining 1% y/y and increasing by 2% q/q. The main issue, however, is profitability. The EBITDA margin was 11% in the quarter vs 16% last year and 16% last quarter. The main reason for the weakness is the Connect acquisition, although other factors have contributed. EBIT in Q2 2024 is less than in Q1 2023 (the quarter immediately before Connect consolidation) on an absolute basis. InfraCom’s main Communications and Managed services segments should be relatively stable. Hence, we are inclined to believe the profitability issue stems from Connect. Ultimately, the fundamental problem is the cost base, which is in management’s immediate control.

InfraCom is reducing its cost base and expects some 30 employees to be laid off or reduced through natural attrition. Additionally, InfraCom is consolidating operations by merging the Stockholm offices and closing offices in Nyköping and Åmål. These are expected to save SEK24m annually from year-end. We reduce our OPEX assumptions, assuming the SEK24m cost reduction is realized over the next four quarters, somewhat slower than management’s expectation.

Redeye reduces its sales estimates and cost assumptions per management’s outline. Following the 27% sell-off from the earnings report, InfraCom trades at an EV/EBITDA of 8.1x for 2024e – which we believe is trough earnings. We believe successive steps to improve profitability, which will be crystalized in the earnings reports, will catalyze the share. We reduced our fair value range from SEK20-42 with a Base Case of SEK34 to SEK14-38 with a Base Case of SEK23. InfraCom is approaching its debt covenant, but we believe realizing the total return swap (TRS) would considerably improve InfraCom’s debt and balance sheet. We believe the worst is in the stock, although the share can continue to be weak for a while.