October’s reporting season has brought stronger cash generation at Carasent, a clearer recovery at Hexatronic, and more difficult questions about growth at Evolution and Vitec. The reports have moved the investment cases in different directions.
Before the next round of results arrives in November, I want to bring together what I have learned from these four reviews and what I will be looking for next. The common question is how much of the progress in the business will reach each shareholder, and what we are paying for it.
Carasent is turning growth into cash
Carasent’s Q3 revenue grew 12% organically, while its EBITDAC margin, which deducts capitalised development, rose to 20% from 15%. That gives me more confidence in the underlying improvement than the lower reported EBITDA margin would suggest.
In my 15 October review, I kept my BUY view. The Nordic business is progressing, while Germany remains a drag. I will watch whether better cash generation continues as Carasent integrates InfoSolutions and develops its software.
Evolution is doing more for each remaining share
Evolution’s quarterly profit fell, while earnings per share rose to €1.31 from €1.25 a year earlier. Buybacks reduced the number of shares sharing in those earnings.
That is a useful contribution to returns. It also makes it important to follow total profit alongside earnings per share. Europe and Asia are still recovering slowly, and the temporary closure of the Brazilian studio adds uncertainty.
In my 26 October review, I kept my BUY view. The next improvement I want to see is stronger growth in the business itself. Buybacks can make each share more valuable. They still need a business that produces enough cash after normal tax payments and investment.
Vitec needs more growth from what it already owns
Vitec’s profitability remains strong, but organic subscription growth was 4.1% in Q3. Acquisitions supplied much of the increase in sales.
This matters because buying the next group of businesses requires funding. Cash spent on development, leases and dividends is no longer available to pay for acquisitions. A forecast that includes acquired growth needs to include the purchase prices and their financing too.
My 28 October review corrects a weakness in that part of my earlier model. The lower expected return is partly a correction to my analysis, alongside weaker growth evidence and a higher starting share price. Stronger organic growth would improve the case without requiring another acquisition to fund.
Hexatronic shows why a recovery can still lead to HOLD
Hexatronic delivered 17% organic growth in Q3. Fiber Solutions is contributing again, and Data Center has become a larger part of the group. The operating recovery has stronger evidence behind it.
The shares have recovered as well. My 30 October review moved to HOLD because the expected return at the article’s price was below my usual hurdle. I also corrected the acquisition funding in the model.
I can become more confident in a business while finding its shares less attractive to buy. With Data Center, I also want to see what demand looks like after a quarter helped by summer work and large projects.
What the reporting season has shown so far
For each company, I want to separate growth from existing operations, growth bought through acquisitions, and the effect of changes in the share count. Then I want to understand the cash required to keep that growth going.
What comes next in November
RaySearch reports on 3 November. After a weak first half, I want to see whether the delayed US orders are coming through in revenue. RayCare’s progress in clinical use and the cash left after development spending will matter alongside the headline growth.
Pexip reports on 5 November. The question is whether growth in Secure Communications can continue to outweigh pressure in Connected, while supporting profitability. Ørsted reports the same day, with project delivery and financing central to my assessment.
I am also watching Pandora on 4 November, and Ambu and ChemoMetec on 5 November. I will be looking for what has changed in demand, margins and cash generation.
Embracer follows on 11 November. I will focus on cash generation and the value of the businesses that remain after the separations.
New companies on the research list
I am also looking beyond the companies already covered. Thule and Medistim are among the names on my research list, adding consumer products and medical technology to the mix. I want to understand the quality of their growth, the capital they need and whether the valuation leaves enough room for an attractive return. The aim is to bring new investment ideas into the coverage alongside the report updates.
For paid subscribers, the coverage guide brings together the company analyses, investment cases and questions I am following.
Thanks for reading,
Fjord Alpha