Stockholm (HedgeNordic) – Activist investor Accendo Capital first invested in Swedish fiber optic solutions provider Hexatronic in April 2016 and became the company’s largest shareholder later that year. This relationship witnessed outstanding growth and value creation as Hexatronic’s share price surged from under 5 SEK to over 160 SEK by late 2022, before dropping to under 18 SEK in late 2023 primarily due to macroeconomic and commercial challenges. However, the downward pressure has subsided, with Hexatronic shares rallying 47 percent in the past month alone.

Before discussing Hexatronic’s recent recovery, let’s explore its journey with Accendo as a core investor, today the company’s third-largest shareholder with a 6.0 percent stake. “Hexatronic has come a long way since Accendo first invested in April 2016 and joined the board of directors,” says Mark Shay, Accendo’s Stockholm-based partner and portfolio manager, also Chairman of the Hexatronic board nominating committee. At the time, Hexatronic was focused heavily on the Swedish fiber-to-the-home (FTTH) market, generating SEK 1 billion in net sales and SEK 100 million in EBITA. Since Accendo’s initial investment, Hexatronic has significantly broadened the scope of its operations.

“Hexatronic has come a long way since Accendo first invested in April 2016 and joined the board of directors.”

Mark Shay

During 2023, despite a weakening market in the latter half of the year, the company generated more than SEK 8 billion in net sales and SEK 1.2 billion in EBITA. Sweden contributed less than 9 percent to overall group sales, with North America accounting for 38 percent. “The company has expanded in recent years into data center and harsh environment applications, which both offer attractive margins and growth dynamics that are independent of the FTTH segment,” explains Shay. This expansion of business operations, revenues, and earnings was for a time reflected in a notable surge in the share price.

Negative Developments

Hexatronic’s stock took a steep dive starting in late 2022, dipping below 18 SEK a year later. “The negative macro catalyst was the rising cost of debt capital, which changed the return calculations for fiber network operators and made expansion less attractive for them so they slowed down purchasing,” explains Shay. “The effects varied widely by operator and geography, but higher financing cost was a broad trend that depressed shares of fiber material suppliers, including Hexatronic.”

“The negative macro catalyst was the rising cost of debt capital, which changed the return calculations for fiber network operators…”

Mark Shay

Shay highlights that tight supply and delivery concerns from 2020 to 2022 prompted customers to purchase ahead of actual demand, resulting in the accumulation of excess inventory. “When demand slowed, the industry entered a negative cyclical phase where customers consumed already produced and stored inventory, which decreased the need for new production of goods,” he explains. Furthermore, Shay highlights several company-specific events that exacerbated the decline in Hexatronic’s share price throughout 2023. 

“The company made a few public disclosures over the course of 2023 that lacked transparency and were surprisingly late to recognize a sharply weakening market,” notes Shay. Disappointing cash flow in the third quarter worried investors, along with concerns about the shift from sharply positive to negative organic growth. “Some investors believed the company would need to issue equity capital to balance outstanding leverage.”

“Regardless of how one views short sellers or the quality of their analysis, shorting the stock from 160 or 130 or 100 down to 18 was a profitable trade.”

Mark Shay

Beyond all of these factors, Hexatronic became a target of aggressive short sellers starting around May 2023. “There was insightful fundamental analysis but also absurd rumors about the company that circulated during mid-2023 and attracted short sellers,” Shay recalls. Short interest peaked at 14 percent of shares outstanding, making Hexatronic one of the most heavily shorted companies on the Swedish stock exchange.

“Regardless of how one views short sellers or the quality of their analysis, shorting the stock from 160 or 130 or 100 down to 18 was a profitable trade,” argues Shay. He highlighted the fundamental factors that led to the share price decline, likely amplified by the high degree of retail share ownership. “Strictly looking at the share price movement, the short interest was justified and the shorts got it right during 2023.”

The 2024 Rebound

Following a challenging 2023 for Hexatronic’s share price, the start of 2024 brings more promise for investors, with the share rising sharply, over 35 percent year to date. Shay explains the recent share price increase by revisiting the catalysts that drove it down. 

Interest rates have eased somewhat and are projected to decline, while “the inventory drawdown in the industry has been going on long enough now that fiber suppliers are anticipating a potential recovery from the second half of 2024 back to historical norms.” Additionally, Hexatronic’s fourth-quarter report showed strong operating cash flow used to pay down debt, indicating leverage is under control without the need for new equity capital. Shay adds that “the company was transparent on upcoming capex and M&A spending, and several business segments and geographies performed well resulting in a group-level EBITA margin in line with guidance and well above that of many industry peers.”

“If a lot of short sellers suddenly become buyers of the share to cover their positions, it can create a short squeeze. When the market’s view of a stock changes suddenly, the price can move fast.”

Mark Shay

“There was an element of short sellers covering their positions, which contributed to the rebound in the stock price,” notes Shay. However, he emphasizes that the modest 1-2 percentage point decline in short interest recently suggests this effect was limited. Shay further clarifies that a current 10 percent short interest translates to about 20 million shares borrowed by fund managers, who pay prime brokers a small fee to borrow these shares with the hope of buying them back at a lower price in the future.

“If a lot of short sellers suddenly become buyers of the share to cover their positions, it can create a short squeeze. When the market’s view of a stock changes suddenly, the price can move fast.” Shay explains that the 20 million shares sold short create a significant overhang compared to the typical daily trading volume of just one or two million shares.

Accendo’s Long-Term Perspective

Despite achieving outstanding returns since its initial investment through the end of 2022, Accendo opted against divesting at the first sign of trouble. “Accendo’s rationale for holding the investment is that the company’s growth trajectory is far from finished,” argues Shay. The team at Accendo projects that Hexatronic could reach SEK 15-20 billion in net sales and SEK 2.5-3.5 billion in EBITA over the next 4-5 years. 

“Accendo’s rationale for holding the investment is that the company’s growth trajectory is far from finished.”

Mark Shay

Shay underscores the increasing demand for bandwidth, which serves as a crucial growth driver for Hexatronic. “Think about how much water, food, and electricity you consume during a given year. It might increase from one year to the next, but not by much,” says Shay. “Consider instead another necessity: data,” he emphasizes. “Data consumption in society is increasing exponentially and there is no viable substitute at scale for fiber.”

Shay regards 2023 as a temporary downturn for Hexatronic with parallels to 2018, when the Swedish FTTH market declined and the share fell 40 percent before increasing nearly 20x over the next four years. He notes the company is financially stronger and more diversified today than in 2018, and anticipates a resumption of robust global growth from 2024 to 2030. “Once growth returns and the company’s financial performance and transparent communications win back investors lost during 2023, today’s depressed valuation multiples will correct and the company will return to the large cap list,” concludes Shay. “Our goal as an active owner remains to help the company reach these targets.”