InfraCom: Resurgence with solid results and attractive valuation
Rasmus Jacobsson answers the top questions on this Research Update
Research Update
2025-02-21
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Analyst Q&A
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Rasmus Jacobsson will answer the top questions on this Research Update
Ends in 2 days and 1 hour
Redeye states the report was better than anticipated and is another print that InfraCom is past its trough. Redeye revised its estimates and fair value range. Redeye states that InfraCom’s EV/EBITDA multiple remains below historical averages, and it expects a re-rating to occur as the market regains confidence in the turnaround.
Rasmus Jacobsson
Fredrik Reuterhäll
Contents
Investment Thesis
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Higher sales fuels significant EBITDA beat
InfraCom delivered a robust report, beating Redeye Research estimates (RRe) by 5% on net sales. This strong performance led to a 22% EBITDA beat, with margins 1.6pp above our forecast. The results indicate that the worst is behind InfraCom, as management’s restructuring and strategic initiatives begin to bear fruit. The Communication segment stood out, growing 29% y/y and 16% q/q. We believe part of the performance was driven by market share gains after a competitor’s mobile network operator switch.
Revised estimates
We have raised our sales estimates by 4% for 2025 and 1% for 2026e–2027e. However, due to the immediate booking of sales provisions against subscriptions recognized over time, a temporary negative margin impact is expected, leading us to adjust our EBITDA margin downward by 0.5 percentage points. We do not anticipate major acquisitions during 2025 as the net debt/EBITDA is in the higher range at 2.23x versus the covenant limit of 3.0x.
Upgrade Base Case to SEK27.0
We are optimistic that InfraCom has passed its trough, with management taking decisive steps to secure long-term growth. The board’s decision to raise the dividend to SEK0.60 (from SEK0.55) reflects their confidence in the company’s stability. Accordingly, we raise our Base Case target to SEK27.0, while maintaining our Bear and Bull Cases. Despite a 62% rally from its lows, the share trades at an attractive 6.5x EV/EBITDA on RRe 2025 estimates versus a five-year average of 10.5x, suggesting significant room for a re-rating as market confidence is restored.
| Key Financials | |||||
|---|---|---|---|---|---|
| SEKm | 2022 | 2023 | 2024 | 2025e | 2026e |
| Total Revenue | 355.3 | 729.9 | 846.3 | 885.5 | 881.0 |
| Revenue Growth | 30.1% | 105% | 15.9% | 4.6% | -0.5% |
| EBITDA | 81.8 | 118.0 | 108.5 | 110.8 | 122.1 |
| EBIT | 68.1 | 89.9 | 79.0 | 94.6 | 103.9 |
| EBIT Margin | 19.3% | 12.4% | 9.4% | 10.7% | 11.8% |
| Net Income | 52.7 | 63.8 | 101.6 | 65.6 | 73.0 |
| EV/Sales | 2.4 | 1.8 | 0.9 | 0.7 | 0.7 |
| EV/EBIT | 12.4 | 14.2 | 10.0 | 6.5 | 5.7 |
Case
Investors are throwing the baby out with the bathwater
InfraCom has had a challenging few quarters, with subpar profitability and its largest acquisition to date (Connect) struggling with performance, as evidenced by two consecutive earnout write-downs. CEO Bo Kjellberg is candid about the challenges, and we believe subscription-based business remains sound. Hence, fundamentally, InfraCom faces a cost base issue. Thus, we believe management has several levers to pull to improve profitability – several are already being implemented. InfraCom is reducing its cost base and expects some 30 employees to be laid off or reduced through natural attrition. Additionally, InfraCom is consolidating its operations to reduce costs by up to SEK24m annually from the end of 2024. InfraCom trades at a discount due to its current challenges, but we believe the valuation will improve as InfraCom's improved profitability is crystalized in the earnings releases.
Evidence
Solid underlying business
Communications (mobile phone services) and Managed services (sale of cloud-based IT services, data centres, data communication, and internet access) remain stable, each growing in the mid-single to high-single-digit range y/y, despite the macro environment. However, profitability remains weak, with the EBIT margin for the two segments decreasing from 23% before the consolidation of Connect (Q1 2023) to 11% in Q2 2024. We believe these two segments are burdened by OPEX relating to Connect, and improving their margins should be under InfraCom’s control. These two segments returning to their pre-Connect EBIT margin would result in SEK132m in EBIT annually and equate to 6x EV/EBIT 2024e. Thus, we think the underlying business remains decent.
Challenge
Commoditsation risk
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.
Weak organic growth and acquisitions prove unattractive
InfraCom's core market is not growing; we believe organic growth is negative to zero. InfraCom has historically grown through attractive acquisitions, such as buying assets out of bankruptcy. However, as the Group has become larger, larger acquisitions were required. This resulted in InfraCom acquiring a much more seasonal sales organisation, Connect, which has proven to be a poor acquisition. Hence, the longer-term vision could be challenged by fewer attractively priced and failed acquisitions and
Valuation
EV/EBIT 6x on margin reversal to pre-Connect consolidation
We believe the worst is in the stock, with InfraCom trading at EV/EBITDA of 7.5x for 2025e—which we believe to be trough earnings. We believe most of the issues InfraCom has experienced are within its control to solve. For instance, InfraCom's Communications and Managed Services segments reverting to pre-Connect margins would produce EBIT of SEK132m—or 6x EV/EBIT. Based on our DCF model, we see a fair value of SEK23 per share in our Base Case and SEK14 and SEK38 per share in our Bear and Bull Cases, respectively.
Disclosures and disclaimers
Contents
Investment Thesis
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