Hexagon: Fear is a friend to the long-term-oriented investor

Hexagon is currently being significantly affected by the tariff uncertainty that slows down industrial customers’ investment activity. Historically, the company has performed well even during negative demand shocks and has been able to catch up on the lost sales fast once the market has stabilized. We find the current valuation attractive and reiterate our Accumulate recommendation with an unchanged target price of SEK 100.

Q1 figures were below expectations

On Friday, Hexagon published preliminary headline figures from Q1 that were weaker than expected overall. Revenue amounted to 1,323 MEUR, which was 2% below both our and consensus estimates. Adjusted EBIT was 345 MEUR, which was 12-13% below our and consensus estimates. Organic growth amounted to 0% (we estimated 1.5%). Recurring revenue, including software and services, grew strongly during the quarter, which was, however, more than offset by the weakness in sensor sales. Sales in North America and China declined in the last two weeks of March. Adjusted EBIT was also negatively affected by 6 MEUR FX effects, which was an opposite to our expectations and thus explained some 4pp of the earnings miss.

Uncertainty slows down industrial decision-making

Even if the Q1 sales miss was rather modest, Q2 will likely be even worse given that market uncertainty has increased during April. A 90-day pause to US tariffs on imports from most countries could allow some relief, but the increased tensions between the US and China could still burden the demand significantly. We currently model in -4% organic sales growth for Q2 after 0% in Q1. The high and growing share of recurring revenue (41% of revenue in 2024) partially mitigates the overall decline. We project adj. EBIT to decline by 8% in Q2, which is a similar magnitude compared to the COVID-era (H1’20 EBIT: -9% y/y). The company considers whether it needs to adjust its cost base to a lower demand. Our forecasts include tighter than usual cost control but no significant restructuring measures.

Hexagon is a relatively stable company with high profitability even during downturns

Even if we expect weak demand in the short term, we are not too worried about the long-term impacts of the current situation. The past shocks in the economy have only had short-lived impacts on Hexagon, and the company has been able to maintain strong profitability even during bad times. We cut our revenue estimates for 2025-26 by 2%, meanwhile, the adjusted EBIT decreased by 6% for 2025 and 3% for 2026. Adjusting for acquisitions, we currently expect adj. EBIT to decline by 3% y/y in 2025 compared to a 1% decline in 2020 owing to the COVID-pandemic. We expect some normalization in revenue during H2 (1% organic growth), but a similar rebound as in H2 2020 is unlikely given that even a 10% tariff level could slow down the global investment activity in the manufacturing sector.

Valuation is attractive for a long-term oriented investor

Hexagon currently trades at an adjusted EV/EBIT multiple of 15x for 2025e and 13x for 2026e, which we find attractive. Previously, we considered an EV/EBIT multiple of 18x to be fair for the company, but in the current very uncertain market environment, we would like to have more of a safety margin and consider a fair value multiple of 16-17x. Hexagon is a diversified, value-creating, high-quality technology company that has historically grown organically at around 5% per year over the cycle and has consistently improved its gross margins. It has some leverage, which adds to the risk profile, but we believe that net debt to EBITDA of around 1.8x (2024) is a relatively safe level for a company as stable and diversified as Hexagon. The likely spin-off of Asset Lifetime Intelligence and related businesses to a US-listed company could be a valuation driver in a year's time, but our positive view of the stock is not based on this transaction.