US duct, FTTH in Europe – mainly Germany – continued to be soft, while North American FTTH – where Hexatronic continued outperforming peers – Harsh Environment and Data Center did well. Total sales was 6% above our forecast of SEK1 758m and amounted to SEK1 861m (1 795), corresponding to 4% growth y/y. The organic growth y/y was -23%, somewhat beating our forecast of -28%. Regarding Duct and FTTH, Management expects its relevant markets to remain at the level seen in Q4 for H1 2024 and a gradual improvement from H2 2024 and onwards – in line with the view of relevant peers having reported their Q4s so far. That suggests that the worst is behind us, although H1 2024 is likely to be soft as well. Finished destocking – which has had a greater negative impact on Hexatronic’s competitors – BEAD and other governmental support and lower costs of capital are expected to drive the improvement.

EBITA (adjusted for SEK29m in restructuring costs) was SEK199m, corresponding to an EBITA margin of 10.7% (17.3). Higher sales and lower OPEX mitigated the effect of a somewhat lower gross margin compared to our forecast. The operating cash flow was SEK462m (292) and was positively affected by a net working capital (NWC) contribution of SEK259m. NWC relative to rolling twelve months sales decreased to 17% (21.8 in Q3). The strong cash flow should remove worries about Hexatronic possibly needing a share issue. On 2023 figures, current net debt equals 1.4x EBITDA and in our 2024 forecasts, EBITDA equals 1.7x net debt. Thus, even though we expect decreasing EBITDA, the net leverage is well within healthy territory.

We raised our Base Case to SEK43 (37) based on increased forecasts and the strong cash flow seen in the quarter – significantly reducing the downside risk in the case. While the sharp swings in our Base Case and forecasts highlight the short-term uncertainty in the business, given our assumption of a market bottom in Q4 2023/H1 2024, Hexatronic is trading at an, in our view, attractive valuation of 9.2x and 6.6x EBITA 2024 and 2025 respectively.