Hexagon Q4'24: Organic growth recovery already priced in

Hexagon reported a solid Q4, although organic growth remained low as expected. Recurring revenue continued to grow well, driven by SaaS, and profitability slightly exceeded market expectations. The company's guidance and general macroeconomic indicators suggest that cyclical demand will remain soft in early 2025, which slightly increases the uncertainty around the timing of the expected recovery in organic growth, which we expect to occur gradually towards the end of the year. Increased valuation multiples don't leave room for upside, which is why we reiterate our Reduce recommendation with an increased price target of SEK 125 (was 120).

Profitability slightly above expectations in Q4 report

Growth remained subdued in Q4 due to weak hardware sales and, to some extent, low demand in key industries such as construction and automotive in EMEA and North America. Organic growth of 1% year-on-year was in line with our estimate, although revenue beat consensus by almost 3%. Recurring revenue such as software grew well at 7% year-on-year, continuing a similar positive trend seen in previous quarters. Profitability and cash flow were bright spots in the report, with Q4 adj. EBIT beating our estimate by 3% and the consensus by 5%. The year-end net debt of 3.2 BNEUR was 170 MEUR lower than our estimate due to the strong cash conversion in Q4. The company's dividend proposal of EUR 0.14 based on 2024 earnings was in line with our estimate and slightly above consensus (EUR 0.13), which could either reflect management's confidence in future earnings growth or the lack of attractive acquisition opportunities ahead.

Growth assumed to recover gradually in 2025

Hexagon stated that it expects market conditions to remain unchanged in Q1, which we believe means low organic growth will continue in the short term. We expect growth to gradually pick up and estimate organic growth of 5-6% for 2025-26. However, our 2025 organic growth estimates are significantly skewed towards H2 and our Q1 organic growth estimate is only 3%. However, total 2025e revenue growth (9%) is boosted by 3.4pp from the FX changes (mainly stronger USD) and 1.5pp from recent acquisitions. We also expect profitability to continue to improve, supported by a higher proportion of high-margin products such as software. We have raised our 2025-26 adjusted EBIT estimates by 3% due to slightly better-than-expected profitability in the Q4 report and the recently volatile FX-rates.

Risk/reward not attractive anymore

Hexagon currently trades at an adjusted EV/EBIT multiple of 18x for 2025e and 16.5x for 2026e. We believe that 18x is a fair valuation multiple for this diversified, value-creating, high-quality technology company. Current valuation levels no longer offer attractive return expectations, we argue, as our current estimates and fair valuation assumptions would imply a return of only 6% p.a. over the next two years. We also see a risk that the challenges in key industries such as construction and automotive will last longer than expected, which would likely lead to a delayed recovery in organic growth. The likely spin-off of Asset Lifetime Intelligence and related businesses could be a valuation driver in 2025. However, we don't see any obvious valuation upside in the spin-off scenario unless the company can demonstrate that the move will actually help it grow faster over the long term.