Detection Technology - Growth story unabated
Healthy Q3 with strong growth in SBU and softness in MBU as expected
DT’s Q3 figures came in close to expectations. Net sales amounted to EUR 26.9m (+9.5% y/y) vs. EUR 27.9m/27.6m Evli/consensus estimates. Q3 EBIT was EUR 5.1m (19.1% margin) vs. EUR 4.9m/5.2m Evli/cons. SBU sales grew 42.3% y/y to EUR 18.6m (EUR 17.9m Evli) due to strong demand especially in airport applications. MBU sales decreased by -27.6% y/y to EUR 8.4m (EUR 10m Evli) due to softening of the medical CT market and the ramp-down of one key MBU customer’s product. R&D costs amounted to EUR 2.6m or 9.7% of net sales.
Small estimate changes - growth drivers remain strong
Post Q3, we have made only minor upward adjustments to our estimates. Demand for new standard CT systems for airports has accelerated, starting with Europe and the US as previously noted. Chinese authorities are also commencing their standardization of airport CT equipment, which will support security outlook even further, likely starting 2021 onwards. The slowdown in medical market remains a question which management does not have a clear answer on, but most likely this is only temporary. Overall, DT’s growth drivers remain strong, especially in China where Beijing’s “Made in China 2025” initiative, has led to double digit growth rates for local Chinese OEM’s that are DT’s clients. Further support for DT’s future sales growth is provided by DT’s new product launches such as Aurora, a lower-end and price competitive product family for SBU, and X-Panel, a CMOS flat panel detector product family for static imaging (e.g. dental).
The strategy update in Q2 report affirmed that DT is committed to continue growth - no change to medium-term financial targets
In conjunction with its Q2 result, DT announced its updated strategy until 2025. The company's new strategic target is to be the growth leader in digital x-ray imaging detector solutions and a significant player in other technologies and applications where the company sees good business opportunities. The company estimates that the market for digital x-ray imaging detector solutions will be around EUR 3 billion in 2025. DT’s previous strategy until 2020 was based on being the leader in computed tomography and line-scan x-ray detectors and solutions. The total market, as per the company's previous strategy, is estimated to be around EUR 700 million in 2020. Given DT’s current estimated 2019E sales of above 100 MEUR, it’s fair to say that DT is a leader in the scope of the previous strategy. The new 2025 strategy expands the addressable market to an estimated EUR 3 billion in 2025, which will provide plenty of growth opportunity for DT going ahead. DT’s medium-term financial targets remain unchanged; sales growth at least 15% per annum and operating margin at or above 15% in the medium term.
Valuation remains attractive, we maintain BUY recommendation
On our estimates, DT is trading at ~20% discount on EV/EBIT and P/E multiples for ’19-20E, which we see as unjustified. Despite the short visibility, we see investment case attractive due to strong market drivers, especially in China, as well as DT’s compelling strategy and execution capabilities, which should enable DT to grow faster than the market and maintain above target level margins. Due to its proximity to the fastest growing market China and current valuation, DT could be also become an acquisition target. Our target price translates into an EV/EBIT multiple of 16.8x and 13.4x on our ‘19E and ‘20E estimates, some 6-20% under our peer group median, i.e. still leaving upside potential should investment case materialize as expected. Our rating remains BUY with revised target price of 24.0 euros (prev. 23.5).