Hexagon Q4'24 preview: Valuation gap no longer exists

Hexagon will report its Q4 results on Friday, January 31. We expect growth to remain low, weighed down by weak industrial investment. However, we have raised our earnings estimates for 2025-26E due to recent acquisitions and positive FX changes. The recent rise in the company's share price has weakened the risk/reward ratio, which is why we change our recommendation to Reduce (was Accumulate) with a target price of SEK 120 (was SEK 115). We believe that the next key drivers for the share are related to global economic activity and the impact of changes in US trade policy.

Growth to be muted in Q4

Hexagon's organic growth has been declining since Q4'23 and reached -2% y/y in Q3'24. We expect organic growth to improve to 1% in Q4'24, slightly helped by easier y/y comparisons compared to previous quarters. However, we do not see any material change in the fundamental market activity. Weak spots in the market include in particular the construction markets in China and Europe, as well as the European manufacturing and automotive industries. However, we expect some improvement in growth by 2025, which we hope will be reflected in Hexagon's market commentary in the Q4 report. Our Q4'24 adjusted EBIT estimate is 437 MEUR, roughly flat y/y and 2% above consensus. We forecast net debt of 3401 MEUR at the end of 2024.

FX and M&A to provide support to 2025-26 growth estimates

In conjuction with the pre-comment, we have made certain adjustments to our estimates for Hexagon with a net positive impact of 1% on revenue and 2% on adjusted EBIT. The changes are motivated by the recent strengthening of USD/EUR and the relatively small acquisitions of Geomagic and Septentrio in late December and early January, respectively. Our organic growth estimate for 2025 of around 6% is a significant improvement from the weak pace in 2024, as we expect organic growth to continue at a long-term average of 5% per year, possibly with a small bounce in 2025 due to the low starting point in 2024. The most important external driver for organic growth is the development of the global macroeconomy, which could be partly influenced by the decisions of the newly elected US president. Hexagon's revenue is more balanced across geographies, so overall growth and investment levels are relevant indicators.

Valuation not attractive enough with the increased share price

Hexagon currently trades at an adjusted EV/EBIT multiple of 20x for 2024e and 17x for 2025e. We believe 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 flag that there is a risk of a delay in the recovery of organic growth due to political concerns. The recent changes in the company's management and governance seem to have stimulated the market valuation. We believe the nominations are a good fit for the company, but their near-term impact on earnings is likely to be muted and the long-term impact is still difficult to assess.