Hexatronic's Crossroads: Can Margin Recovery in Data Centers Offset Fiber's Struggles?

Hexatronic AB (STO:HTRO), a Swedish connectivity solutions provider, finds itself at a critical juncture. While its traditional Fiber Solutions segment grapples with overcapacity and pricing pressures, the company's Data Center and Harsh Environment divisions are surging ahead. This sector divergence has created a complex valuation puzzle—one that hinges on the execution of a high-stakes turnaround plan and the company's ability to leverage growth in higher-margin markets.

The Divergent Pathways

Hexatronic's Q2 2025 results starkly illustrate its dual realities. The Fiber Solutions segment, which accounts for 65% of sales, saw net sales plummet 16% year-on-year, with EBITA margins collapsing to 6.4% from 11.6%. The decline stems from weak demand for fiber-to-the-home (FTTH) equipment in North America and Europe, exacerbated by intense price competition. Meanwhile, Data Center and Harsh Environment segments delivered a different story: Data Center sales surged 38%, driven by high-margin projects in commercial and industrial markets, while Harsh Environment sales rose 4% despite supply chain headwinds.

The stock's 59.9% decline year-to-date reflects investor skepticism about Fiber Solutions' woes. Yet the company's valuation metrics now present an intriguing opportunity. With an EV/EBITDA of 6.46 and a forward P/E of 9.55, Hexatronic trades at a significant discount to its historical multiples. However, its Altman Z-Score of 2.9—below the 3 threshold signaling distress—adds caution.

The Performance Improvement Program: A Lifeline for Fiber Solutions?

Hexatronic's hope lies in its Performance Improvement Program, announced in early 2025. The plan aims to stabilize margins by shifting resources from margin-eroding FTTH projects to adjacent growth areas like energy infrastructure, defense, and industrial automation. Management also plans to cut costs through restructuring and operational efficiencies at Rochester Cable, its Harsh Environment subsidiary.

Crucially, the full details—including cost targets, geographic priorities, and financial metrics—will be unveiled on September 11, 2025, during an investor update. Until then, the program's success remains speculative. Skeptics question whether the Fiber division can recover its former profitability in an oversupplied market. Bulls, however, argue that reallocating capital to higher-margin niches could reposition the segment as a steady, if smaller, contributor.

Valuation: Discounted for Risk, but Priced for Recovery?

Hexatronic's market cap of SEK 4.54 billion and enterprise value of SEK 7.00 billion suggest investors are pricing in a worst-case scenario. The company's net debt of SEK 1.8 billion (1.9x EBITDA) is manageable, thanks to a robust liquidity buffer of SEK 1.6 billion in cash and undrawn credit facilities. Still, its trailing P/E of 12.27 and FCF yield of 7.47% indicate that the stock is undervalued relative to its earnings potential if the turnaround succeeds.

Analysts' average price target of SEK 60.25—53% above current levels—hints at optimism. Yet investors must weigh this against risks: Fiber Solutions' Q3 margin is expected to remain “in line with Q2,” implying no near-term improvement. Without clarity on the September update, the stock's volatility (beta of 1.46) could persist.

Investment Considerations

• Bull Case: If the Performance Improvement Program delivers cost savings and margin expansion, Fiber Solutions could stabilize, freeing capital to fuel acquisitions in Data Center and Harsh Environment. With those segments already driving 59% of group EBITA, Hexatronic's valuation could rebound sharply.
• Bear Case: If Fiber's decline continues and the program underwhelms, the stock could drift lower, especially if macroeconomic headwinds dampen Data Center demand.

Actionable Takeaway: Investors seeking a speculative growth play should wait for the September investor update. If the company outlines credible margin targets and growth pathways, the stock's current valuation—particularly its EV/EBITDA of 6.46—could make it compelling. For now, cautious investors might use dips below SEK 40 as entry points, with a strict stop-loss given the equity's volatility.

Hexatronic's journey underscores a broader truth: in a fragmented connectivity market, winners are those who pivot swiftly. For now, the stakes are high—and the September update could redefine this stock's trajectory.