Detection Technology - COVID-19 - a near term threat with a silver lining
COVID-19 – both a threat and part opportunity
DT usually doesn’t give full year guidance due to short visibility into customer demand. With the ongoing corona pandemic, it’s even harder to make predictions now. As airline travel is constrained, the pandemic can be expected to weigh negatively in H1 on SBU, which represents roughly 2/3 of DT’s sales. On the other hand, CT scanning is used to detect virus-related pulmonary changes, which in turn increases demand for CT scanners especially in China. DT’s recently launched new production facility in Wuxi provides additional capacity to support the possible increase in demand for CT equipment. As CT equipment plays an important role in diagnosing and treatment of COVID-19, DT has been permitted to keep its Beijing site operational and start manufacturing in Wuxi despite restrictions set by the local and national authorities in China.
Estimates cut, but investment story remains compelling despite near term uncertainties
Given the change in the landscape due to COVID-19, we’ve slightly lowered our Q1 estimates, especially for SBU. For Q1’20, we estimate SBU declining -2% and MBU declining -7% y/y, with total Q1 net sales declining -4% y/y to 22.2 MEUR (22.3 MEUR cons). Our Q1 EBIT estimate is 2.8 MEUR (2.9 MEUR cons), which is down 30% compared to 3.9 MEUR last year. We’ve revised down our FY’20E sales growth estimate from 10% to 6%. We still expect most of the growth to materialize in H2 as growth returns, especially in China, and volumes of new Aurora and X-Panel CMOS products ramp-up. Consequently, we’ve also lowered our FY’20E EBIT estimate by 11% due to lower sales and increased spending. Our estimates beyond 2020E are broadly unchanged, and we expect EBIT to improve in medium term due to volume growth and better GM’s due to mix and new products. We note however that coronavirus poses a clear near-term threat to our estimates, especially if the current situation is prolonged.
We maintain TP of 24 euros, with rating BUY (prev. HOLD)
On our revised estimates, DT is trading at 15x and 12x EV/EBIT multiples for 20E-21E. This is roughly 15-20% below our peer group, which we see inexpensive and unwarranted given strong market drivers, especially in China, as well as DT’s compelling strategy and execution capabilities. We maintain our target price of 24 euros, rating is now BUY (prev. HOLD).