Hexagon Q1'25 preview: Diversification and quality to protect against the worst

The recent ~30% decline in the share price offers an attractive entry point for a long-term investor. The high share of recurring revenue such as software and services should partially mitigate the upcoming weakness in the hardware sales caused by tariff uncertainty. We note, however, that even after reducing our 2025 adjusted EBIT estimate by 8%, there is still elevated uncertainty around the estimates. However, we find the current valuation attractive for a long-term value creator like Hexagon, which is why we upgrade our recommendation to Accumulate (was Reduce) and lower our target price to SEK 100 (was SEK 125).

Q1 expected to continue in line with the previous quarters

Hexagon will publish its Q1 2025 report on April 30. We expect Q1 revenue to be somewhat in line with the previous quarter, including slightly negative growth in cyclical, hardware-led segments such as Manufacturing Intelligence and Geosystems. On the other hand, we expect recurring revenue, including software and services, to continue to grow at around 7% year-on-year. Our total revenue growth estimate for the first quarter is 4%, including 1.5% organic growth and a positive contribution from both M&A and FX changes. The improving revenue mix should also be reflected in the gross margin, which we estimate to improve by 0.4pp to 66.9%. Our adjusted EBIT estimate of 397 MEUR corresponds to a margin of 29.4% (Q1'24: 29.0%).

Tariff uncertainty could prevent a growth recovery in 2025

The high level of uncertainty surrounding global trade tariffs is likely to affect Hexagon's customers' investment activity in the early part of the second quarter. It is still difficult to estimate what kind of tariffs will ultimately be imposed and what the impact will be on global GDP growth in 2025. We currently assume global GDP growth to decline from around 3% in 2024 to around 1% in 2025. We have lowered our 2025 revenue and adjusted EBIT estimates by 6% and 8%, respectively, due to the weaker economic outlook and partly due to the weaker USD/EUR. We don't expect the direct impact of the tariffs to be significant, as approximately 6% of Hexagon's sales are imported into the US, and even a portion of these products are highly specialized technologies that are unlikely to be replaced by domestic production, at least in the short term. There's also the possibility that a reshuffling of global production chains could also encourage investment, for example in the US automotive industry, which could mitigate the apparent negative impact of the tariffs. Our current 2025e revenue growth estimate of 2.6% includes 0.9% organic growth and a positive contribution from the small acquisitions completed in 2024. We would also like to highlight that approximately 41% of Hexagon's revenue in 2024 is recurring in nature. The positive growth trend (2024: 7%) in recurring revenue, including both software and services, should support growth in the short term despite market uncertainty. A further decline in hardware sales could also improve the revenue mix and increase gross margins similar to 2024.

Discounted valuation for a diversified value-creator

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 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 on the stock is not based on this transaction.