Alcadon - Strong cash flow steals the headlines - ABG

Q2: strong cash flow and signs of improving FTTH
Alcadon delivered Q2 adj. EBITA 2% below our expectations, but cash flow was very strong, primarily thanks to a working capital release of SEK 43m, equal to 4.3% of market cap. As a result, r12m lease adj. ND/EBITDA (excl. earn-outs) is now down to 1.9x compared to 2.2x at the start of the year. The data centre vertical continues to be the main organic growth driver, but Alcadon also mentions that fibre-to-the-home (FTTH) customers now have clear plans to increase their investment rates as a result of lower interest rate expectations. This is an especially good sign, in our view, given that the weak FTTH market has been weighing on organic growth recently.

Adj. EBITA raised by 2% p.a., mainly on higher gross margin
Our organic sales estimates are left mostly unchanged, as Q2 sales were only 1% below our expectations, although updated FX rates constitute a slight headwind. Moreover, the split between COGS and operating costs in the newly acquired Wood Communications was different from what we had thought, and as such we now raise our gross margin assumptions but partly offset this with higher opex. The net effect of this is that adj. EBITA comes up by 2% per annum for '24e-'26e.

7.4x '25e EV/EBITA; 8-11% '25e-'26e lease adj. FCF yield
The share is now trading at 7.4x '25e EV/EBITA while offering a lease adj. FCF yield of 8-11% for '25e-'26e. We see clear signs from both Alcadon and several fibre optics equipment providers that FTTH demand looks set to gradually improve from low levels. Therefore, we are becoming increasingly confident that organic growth should accelerate into '25e, in turn supporting margins as well, and we estimate an adj. EBITA CAGR of 17% for '24e-'26e.

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