Sdiptech: Undervalued on Multiples, Overburdened by Debt?

Sdiptech’s CEO, formerly CFO at Lagercrantz, brings valuable experience to the company. However, Sdiptech’s relatively high debt levels require sustained strong cash flow generation.

I. First Principles: Understanding the Nature of the Beast

It is noteworthy that Sdiptech's current Chief Executive Officer, Bengt Lejdström, previously held the position of Chief Financial Officer at Lagercrantz. My own experience with Lagercrantz, Bergman & Beving, and Berner Industrier provides a frame of reference for understanding the dynamics of acquiring and nurturing specialized industrial businesses.

For more background on Berner Industrier, I recommend reading my Substack article:

A critical aspect of Sdiptech's operational philosophy is its explicitly decentralized structure. The group is organized into independent subsidiaries, empowering these individual business units to make decisions near their customers. This approach suggests a belief in the importance of localized market understanding and the entrepreneurial drive inherent in smaller, focused entities. Relationships with customers, key business decisions, and product development are all managed at the subsidiary level. This structure implies a management philosophy that places significant value on the autonomy and organic growth potential of each unit, potentially prioritizing these aspects over the pursuit of centralized operational efficiencies. The underlying assumption appears to be that deep specialization and intimate knowledge of specific infrastructure niches provide a significant competitive advantage in the market. This framework naturally influences how Sdiptech integrates newly acquired companies and the nature of the value that the parent company brings to its subsidiaries, likely leaning towards strategic guidance rather than direct operational control.

II. Time and Resilience: The Enduring Nature and Potential Pitfalls

The very essence of infrastructure – the essential systems that underpin modern society – points to the enduring relevance of Sdiptech's offerings. The combination of aging infrastructure across Europe, rising levels of consumption, and the increasing imperative for more sustainable and safer solutions generates a persistent demand for the specialized technologies and services that Sdiptech provides.

A key element contributing to the potential longevity of this business is its strategy of establishing and maintaining strong niche market positions with limited direct competition. By focusing on highly specialized areas where they can offer unique value propositions, Sdiptech's subsidiaries are likely less vulnerable to broad economic fluctuations and intense price competition. This specialization allows them to sustain healthy profitability and reinvest in the further development of their specific niches, creating a defensible position against competitors. The underlying trend suggests that businesses with specialized knowledge and unique offerings often benefit from higher customer loyalty and greater pricing power. This is directly reflected in Sdiptech's acquisition criteria, which prioritize companies with established and defensible niche positions. Consequently, this strategic focus on market leadership in specific areas enhances the long-term sustainability and profitability of the overall business.

However, several potential challenges warrant consideration. Intensified competition in the market for niche infrastructure companies could lead to higher acquisition prices, potentially making it more difficult for Sdiptech to achieve its targeted returns on capital. While the company aims to acquire businesses in sectors with a low risk of disruption, the rapid pace of technological advancement could still render the offerings of some subsidiaries less relevant over time. Economic downturns, particularly in sectors such as construction to which some units may have exposure, could negatively impact demand for their products and services. Furthermore, the management of a decentralized group comprising over 40 subsidiaries presents inherent complexities in maintaining consistent quality standards, a cohesive organizational culture, and strategic alignment across the entire group. The announced departure of two senior managers in early 2025, individuals who played significant roles in the company's development, also introduces a degree of uncertainty, although current assessments suggest the company remains on a stable trajectory.

A notable risk for a company pursuing a growth strategy heavily reliant on acquisitions is the continuous need to identify and successfully acquire suitable businesses at reasonable valuations. If the market for these specialized infrastructure companies becomes more competitive, Sdiptech might face pressure to pay higher acquisition multiples, which could negatively affect future investment returns. Their stated objective of acquiring businesses contributing SEK 120-150 million in EBITA annually (revised to approximately SEK 100-120 million for 2024) necessitates a consistent and robust pipeline of potential deals. Growth through acquisition, while potentially rapid, inherently carries the risk of overpaying for assets or failing to properly integrate them, even within a decentralized framework. The underlying trend indicates that increased interest in infrastructure and industrial technology sectors could attract more potential buyers, thus increasing competition for acquisition targets. Sdiptech's ambitious growth targets, therefore, depend on their ability to maintain a steady flow of accretive acquisitions. A failure to do so could significantly impede their planned expansion.

While the decentralized operational model offers advantages in terms of agility and local market responsiveness, it also carries the potential for inconsistencies in performance across different subsidiaries and potential difficulties in leveraging synergies that might exist within the group. Effective communication, robust oversight from the parent company, and a strong overarching organizational culture are essential to mitigate these inherent risks. Sdiptech's stated "active owner" approach suggests an awareness of these challenges and an intention to provide strategic support and guidance to their various business units. However, managing a diverse portfolio of independent businesses requires strong leadership and clearly defined frameworks at both the parent company and the subsidiary levels. Poor management of this decentralized structure could lead to underperformance in certain units and a missed opportunity to capitalize on potential cross-selling opportunities or technological synergies that might otherwise be realized in a more centralized organization.

III. Numbers and Narratives: Financial and Non-Financial Considerations

Sdiptech's relatively high level of debt necessitates the continued generation of strong cash flows to meet debt obligations and fund its ongoing acquisition strategy. While the reported net financial debt to adjusted EBITDA ratio, ranging from 2.17 to 2.25, appears to be within a manageable range, it remains a key financial metric to monitor, particularly in the context of their active acquisition pace. The reported organic adjusted EBITA growth of -2% in 2024 is also a notable point, as it falls short of the company's stated target of 5-10%. This suggests that while acquisitions are contributing to overall growth in revenue and earnings, the underlying profitability of the existing portfolio of businesses might be facing some challenges.

The fact that organic adjusted EBITA growth was negative in 2024 despite a 3% increase in organic sales indicates potential pressure on profit margins or an increase in operating costs within some of Sdiptech's subsidiaries. This trend warrants further scrutiny to understand the underlying causes and to assess whether it is likely to persist in the future. Sales growth that does not translate into commensurate profit growth can be a cause for concern. The underlying trend might reflect inflationary pressures on input costs or increased competitive intensity within certain of their niche markets, potentially impacting their pricing power. The economic environment or specific market conditions within the various infrastructure segments they serve could also be contributing factors affecting profitability. If organic profit growth remains weak, Sdiptech will become increasingly reliant on its acquisition activities to achieve its overall growth objectives.

The company's emphasis on adjusted EBITA as a primary measure of financial performance suggests that certain non-recurring items or accounting adjustments are being excluded from this metric. While this can provide a clearer view of the underlying operational profitability of the business, investors should also pay close attention to reported EBITA and net income figures to gain a comprehensive understanding of the company's overall financial performance. It is worth noting that Sdiptech's net profit in 2024 was negatively affected by higher financing costs and an increased tax rate.

Investors should be mindful that while Sdiptech has made real strides in pruning non-core and construction-related businesses, legacy exposures—such as the elevator division and older construction projects—continue to create noise in the reported numbers, with restructuring costs and operational distractions lingering into the quarters ahead. Though management has moved deliberately to refocus the portfolio around essential infrastructure services with more stable cash flows, risks remain: notably, execution risk around divestments, temporary cash flow softness, and the operational integration of new acquisitions in an increasingly competitive market, particularly in the UK and Europe. While the company’s financing stance appears conservative today, history suggests that growth ambitions could, under certain conditions, reopen the door to future equity issuance. Thus, prudence demands attention not only to what is said, but to the underlying character of the business and its stewards.

IV. Partnership and People: Assessing Management and Ownership

The long-term success of Sdiptech's business model is significantly dependent on the capabilities and effectiveness of its management team, both at the parent company level and within its diverse portfolio of subsidiaries. Their ability to consistently identify and secure promising acquisition targets, integrate them effectively into the group (despite the decentralized structure), and provide strategic guidance that fosters growth and profitability will be crucial. The motivation and alignment of interests of the entrepreneurs who choose to sell their businesses to Sdiptech are also important considerations. Sdiptech explicitly positions itself as "a home for entrepreneurs", indicating an understanding of the need to retain key talent and nurture the entrepreneurial spirit that often drives the success of these niche businesses.

A notable positive factor is the background of the current CEO, Bengt Lejdström, who previously served as the Chief Financial Officer of Lagercrantz Group. Lagercrantz employs a similar acquisition-driven, decentralized business model and has achieved considerable success. Mr. Lejdström's prior experience in a senior financial role within such an organization likely provides him with valuable insights and expertise relevant to leading Sdiptech. This kind of relevant prior experience significantly increases the likelihood of effective leadership and successful strategic execution at Sdiptech. The underlying trend suggests that recognizing patterns of success in similar business models can lead to better strategic decision-making. His past role directly informs his understanding of the specific challenges and opportunities inherent in Sdiptech's operating model. As of January 9, 2025, Bengt Lejdström, CEO of Sdiptech AB, holds 86,390 Class B shares, representing approximately 0.24% of the company's share capital, along with 500 preference shares. Additionally, he possesses 50,000 warrants, which grant him the right to purchase shares under specified conditions. Fixed salaries are competitive and reflect individual expertise and responsibilities. Variable cash remuneration is performance-based, linked to predetermined financial and individual targets. It is capped at 50% of the fixed annual salary, but in years without expiring long-term incentive programs, it may reach up to 100% of the fixed salary.

Furthermore, Sdiptech's emphasis on acquiring companies that contribute to sustainability, efficiency, and safety, combined with its decentralized operational philosophy, which empowers individual business units to innovate and directly serve their customers, suggests a motivation that extends beyond purely maximizing short-term financial growth. This focus on creating genuine value for customers and addressing fundamental societal needs can provide a robust foundation for long-term success and resilience. Purpose-driven companies are often more resilient and can attract and retain talented employees and loyal customers. The underlying trend reflects the increasing focus of stakeholders on the broader impact of businesses, including their environmental and social contributions. Sdiptech's mission statement and operational model appear to be aligned with this customer-centric and sustainability-oriented approach. This suggests a management team with a long-term vision that extends beyond simply maximizing short-term profits.

When Peter has joined the company, Sdiptech’s Group Management will consist of:

• Bengt Lejdström - President and CEO

• Anders Mattson - Executive Vice President and Business Area representative

• Susanna Zethelius - CFO

• Peter Helsing - Head of M&A

• My Lundberg - Head of Sustainability & IR

Peter Helsing has over 20 years of experience in M&A. Since the company was listed in 2017, he has most recently served as the global head of M&A at Essity. Prior to this role, he was the Head of M&A at SCA. Peter began his career at KPMG, where he specialized as an M&A advisor, primarily serving clients in the small-cap sector. He will assume his position in May 2025 and will report to Bengt Lejdström, President and CEO of Sdiptech.

V. The Price of Value: Suitability and Potential Returns

Determining whether Sdiptech's current share price is suitable requires a careful consideration of various valuation approaches. While traditional metrics such as the price-to-earnings (P/E) ratio and the price-to-sales (P/S) ratio can offer some perspective, the enterprise value to EBITDA (EV/EBITDA) multiple is often a more relevant metric for evaluating acquisition-driven holding companies like Sdiptech, particularly when comparing them to their peers in the industrial sector.

Analysts at Redeye have observed that Sdiptech has historically traded at a valuation discount compared to some of its peers, including companies like Lifco, Indutrade, Addtech, and Lagercrantz. Their analysis suggests that consistent solid operational performance, particularly in achieving stronger organic growth, could lead to a re-evaluation of the stock by the market and a potential narrowing of this valuation gap. This implies that the current share price might present an attractive entry point for investors with a long-term investment horizon who believe in the company's ability to successfully execute its strategic objectives. Relative valuation analysis can often highlight instances of potential undervaluation in the market. The underlying trend indicates that the market's perception of serial acquirers can evolve based on their demonstrated track record of performance. Consistent positive performance can build investor confidence and potentially lead to an expansion of the company's valuation multiples. The broader implication is that the potential for multiple expansion, in addition to underlying earnings growth, could contribute to attractive returns for investors.

Potential returns for investors in Sdiptech are likely to be driven by a combination of growth in earnings (resulting from both organic initiatives within their existing subsidiaries and further acquisitions) and potential appreciation in the company's valuation multiple should it continue to execute its strategy effectively and the market increasingly recognize its inherent strengths. While Sdiptech currently prioritizes reinvesting its generated cash flow to fuel further growth rather than distributing it as dividends, long-term investors could potentially benefit significantly from the compounding effect of sustained earnings growth and the possibility of a future re-rating of the stock.

Monte Carlo Simulation of Future Outcomes (2024–2029)

Sdiptech is assumed to grow EBITDA from 1240 to 2124, between 2024 and 2029. Given its current valuation at 10.87x EV/EBITDA, and potential future valuation multiples ranging from 3.7x (bearish) to 18x (bullish), I ran a Monte Carlo analysis to better understand possible investor outcomes.

Results from 10,000 Simulations:

• Mean CAGR: 13.56%

• Median CAGR: 15.10%

• 10th percentile (bearish scenario): 4.07%

• 90th percentile (bullish scenario): 20.42%

This suggests that, on average, investors could expect 13–15% annual returns over the next five years if Sdiptech maintains EBITDA growth and trades near historical multiples. However, the range of outcomes is wide: from low single-digit returns in bearish scenarios to above 20% in bullish cases. This is below my ideal 25% annualized returns and margin of safety.

Conclusion:

Sdiptech presents an interesting case study of a decentralized industrial holding company focused on acquiring and developing niche technology providers within the infrastructure sector. The company's emphasis on sustainability, efficiency, and safety aligns with long-term societal trends, and the experienced leadership, particularly the CEO's background at Lagercrantz, provides a degree of reassurance. While the company's acquisition-led growth strategy and relatively high leverage require careful monitoring, the strong cash flow generation and healthy EBITA margins of the underlying businesses are encouraging. The historical discount in valuation compared to peers suggests a potential opportunity for long-term investors, provided Sdiptech can consistently execute its strategy and improve its organic growth performance.

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Please note this is not investment advice.