The Capital Goods Data Miner - May 2024

Our key long ideas are: Alfa Laval, Hexagon, Metso, Sandvik, Volvo. We are cautious on: Autoliv, Nibe, Wärtsilä

Q1 trends, estimates, valuation and top picks

The Q1 reports proved that sector companies could maintain record-high margins despite volume declines.

Waiting for H2 growth improvement

Slower growth, solid margins in Q1. We lower adj. EBITA by 3% on slightly lower '24e growth. H2 growth recovery on easier comps, cyclical recovery, keep BUY.

Hexagon (Buy, TP: SEK140.00) - Resilience despite growth woes

As Hexagon has counteracted criticism of FCF quality, margin profile, and financial reporting transparency in recent quarters, the investor debate has shifted back to the durability of its organic growth. As Q1 showed a sequential deceleration which could persist until H2 (easier comparables), we find our re-rating case slightly postponed. We are encouraged by organic growth in areas key for the investment case (recurring portfolio), FCF strength and margin resilience, and reiterate our BUY and ...

Sales below, good margins and cash flow

Hexagon (Buy, TP: SEK140.00) - FCF set to catalyse re-rating

We are 3% below Infront consensus Q1e EBIT and will focus on 1) organic growth deceleration, and 2) continued FCF improvements (we are 6% above Visible Alpha consensus). For 2024, we see Hexagon outperform as it demonstrates its hallmarks despite cyclical headwinds: 1) defensive 6% organic growth YOY; 2) richer gross margin and benefits of cost savings to drive margin expansion for ~9% YOY EPS growth, with potential upside from M&A; and 3) improved cash conversion to set up 29% YOY FCF growth. W...

Hexagon (Buy, TP: SEK140.00) - Short story closed

The FCF improvements in Q4 mean we can put the main short report criticism behind us. Looking to 2024, we expect Hexagon to show its hallmarks despite cyclical headwinds: 1) defensive 6% organic growth YOY; 2) a richer gross margin and the benefits of cost savings driving margin expansion, leading to ~9% YOY EPS growth with upside potential from M&A; and 3) improved cash conversion to set up FCF growth of 28% YOY. We reiterate our BUY and have raised our target price to SEK140 (135).

Hexagon (Buy, TP: SEK135.00) - Set to return to summer highs soon

The dust is starting to settle regarding accounting and governance scrutiny, as we expected. We believe cash flow improvements in Q4e will further assure investors, while the stock remains attractive from absolute and relative perspectives assuming macro conditions weaken in 2024e. We reiterate our BUY and SEK135 target price.

Decoding Alpha

Our analysis of underlying total shareholder return (TSR) drivers for Swedish Industrial companies reveals that high returns are not synonymous with high valuations. Investors tend to overpay for ‘growth’, while cash returns such as dividends and buybacks are typically deeply discounted. We believe Autoliv, Alfa Laval and Hexagon offer the most long-term TSR potential (13–14% annualised), with SKF and Trelleborg at the other end of the spectrum (8–9%), while also concluding that several stocks l...

Hexagon (Buy, TP: SEK135.00) - FCF keeps lid on share price

Mixed Q3 results included beats in the P&L versus Infront consensus, while weak FCF kept a lid on multiples expansion potential, providing more ammunition for bears versus our bullish view. We expect Hexagon to resolve question marks at its December CMD, and show improvements in its Q4 results. We believe in-line numbers over the coming quarters would be enough to gradually reverse the negative sentiment, while improved incremental margins, a return to double-digit EPS growth YOY (from -3% in 20...

Hexagon (Buy, TP: SEK135.00) - In-line results could be enough

Uncertainty related to the recent negative market press has continued to put pressure on valuation multiples, which are close to trough levels on absolute and relative bases. We see limited scope for consensus increases, but believe in-line Q3 results would be enough to gradually reverse the negative sentiment, while improved incremental margins, a return to double-digit EPS growth YOY (from -5% in 2023e), and better cash conversion despite cyclical headwinds in 2024e should trigger a re-rating....

Northern Lights

Hexagon AB (Buy, TP: SEK135.00) - Attractive despite uncertainty

Despite short-term uncertainty, we believe that: 1) recent short report criticism is exaggerated, especially for organic growth; and 2) Hexagon’s cost-savings programme is another step by the new management to improve the long-term business profile. Once the short-cycle headwinds rise, we expect investors to shift focus towards Hexagon’s relative earnings resilience. We note that Hexagon’s shares outperformed the OMXS30 by 30%+ after cost-savings programmes were announced in 2017 and 2020. At a ...

Northern Lights

Hexagon AB (Hold, TP: SEK140.00) - Time to w(AI)t

We are 2% above Infront consensus EBIT for Q2e and 3% above for 2024e. Hence, we see little scope for meaningful positive consensus revisions, suggesting that we would have to lean towards more AI-driven multiples expansion to find additional upside potential for the stock, implying a more modest near-term risk/return profile. We have downgraded to HOLD (BUY) but reiterate our SEK140 target price.

Hexagon AB (Buy, TP: SEK140.00) - Step in the right direction

We believe it makes sense for the new management team to improve the business profile by investing to accelerate growth and exiting low-margin contracts. We reiterate our BUY and have raised our target price to SEK140 (135), having increased our 2023–2024 adj. EBIT by 2%. We still see support from Hexagon’s hallmarks: 1) structural organic growth drivers offsetting cyclical concerns; 2) gross margin expansion reflected in adj. EBIT; and 3) attractive earnings and FCF resilience given its 2024e E...

Still going strong

Although reported EU taxonomy alignment for the sector is low, we have identified which companies screen best and could benefit from attracting ESG capital. We still favour China, mining, energy and aftermarket exposure, and see upside potential to consensus estimates, but view overall risk/reward as neutral on elevated valuation.

Northern Lights

Hexagon AB (Buy, TP: SEK135.00) - Supportive demand for Q1e

We are 4% above Infront consensus on Q1e adj. EBIT and continue to see support from Hexagon’s hallmarks: 1) structural organic growth drivers offsetting cyclical concerns; 2) gross margin expansion reflected in its adj. EBIT; and 3) attractive earnings and FCF resilience given its valuation at a 2024e EV/EBIT of 17x. We reiterate our BUY and SEK135 target price and have raised our 2023–2024e adj. EBIT and adj. EPS by 4–3%.

Hexagon AB (Buy, TP: SEK135.00) - First results under new CEO in line

The Q4 results included positives: 1) still-strong 8% organic growth YOY, mitigating investors’ concerns on Hexagon’s growth prospects amid a weaker macro climate; and 2) an all-time high gross margin of 66.2%, suggesting medium-term potential. However, there were negatives: 1) a weaker incremental EBIT margin at ~25% versus 30%+ in recent quarters; and 2) soft LTM cash conversion at 72%, mainly due to WC build-up. We still see outperformance characteristics given low estimate risks and a reason...