Hexagon Q1'25: Demand outlook better than suspected

The short-term demand outlook seems to be slightly better than suspected based on abrupt demand slowdown at the end of Q1. The long-term impacts of the tariffs are still unknown. Hexagon has continued to invest for growth, which burdens profitability in the short term despite of increasing gross margins. Strong and continuous growth in recurring revenue and eventual recovery in cyclical sales are strong drivers for earnings growth in the medium term. We reiterate our Accumulate rating and increase our target price to 105 SEK (from 100 SEK) owing to the slightly eased market uncertainty.

Low profitability in Q1 explained by growth investments

The weak growth and profitability in Q1 was already known given Hexagon’s announcement of preliminary headline figures on April 11. Q1 organic growth was at 0%. The weakness came from hardware and perpetual software license sales that suffered in March from customers’ prolonged investment decisions amid tariff-related uncertainty. The most affected countries were Mexico and Canada. Recurring revenue growth accelerated to 10% (we expected 7%). Share of software and services increased to 62.2% (Q1’24: 60.9%) driving up gross margin to 67.2% (Q1’24: 66.5%). Adjusted EBIT was at 345 MEUR, down 32 MEUR y/y. Adjusted EBIT margin declined significantly to 26.1% (Q1’24: 29.0%). Fixed costs increased more than in previous quarters, especially driven by R&D expenses, putting pressure on earnings. Hexagon had positioned its cost structure for growth given the good business momentum in early 2025, which together with abrupt slow-down in demand contributed to the weakened profitability. The company has, for example, launched new products which increases depreciations related to capitalized R&D.

Markets have recovered but a risk of a recession still looms

Hexagon provided interesting details about tariffs and their consequences to the company. The company has seen an improved demand again during April, reducing uncertainty regarding the development in the very short-term. However, the management considered it too early to draw conclusions about how large the impact on demand will be over a longer period of time. Currently, the direct negative impact from tariffs on EBIT would be around 15 MEUR/quarter (1% of sales) without mitigating action. The company, however, has a range of measures to mitigate the direct impact from price hikes to rerouting shipping or relocating manufacturing. We slightly increased our organic growth estimates, but this was offset by negative FX changes (weakened USD/EUR). We cut adjusted EBIT by 2% for 2025-26 due to the increased fixed costs. We did not sense an urgency in Hexagon’s management team to aggressively cut costs amid tariff-related market uncertainties, which could mean that while the demand outlook is decent enough, the EBIT-margin is likely to suffer in 2025 in the absence of a significant positive shift in macroeconomy.

Eventual recovery in organic growth is the main trigger

Hexagon currently trades at an adjusted EV/EBIT multiple of 16.5x for 2025e and 14.6x for 2026e, which we find attractive. In recent years, we have 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 to be 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. The spin-off of Asset Lifetime Intelligence and related businesses to a US-listed company is likely to take place in H1’2026 and could be a potential valuation trigger. Our positive view of the stock is, however, not based on this transaction. We expect the eventual recovery in organic growth (estimated for 2026e) to drive up valuation closer to the fair value.