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Detection Technology - Outlook brightened by vaccine optimism and Chinese recovery

Detection Technology will report its Q4 next Tuesday, February 2nd, at 9:00 EET. We look forward to hearing the latest developments and outlook regarding the security and medical imaging markets, especially now with the backdrop of global vaccine optimism and Chinese economic recovery. We expect DT to return to net sales and EBIT growth path this year, and based on the increased confidence in market improvement, we raise our target price to €26.5 (prev. €22) but maintain HOLD recommendation.

A challenging year coming to an end

We expect Q4 net sales of 22.2 MEUR (22.2 MEUR cons) and EBIT of 2.7 MEUR (2,75 MEUR cons), meaning a decline of -11% and -16% respectively compared to last year. 2020 has been challenging with the pandemic negatively affecting DT’s Security Business Unit, which represents roughly 60% of total net sales. With our estimates, DT’s FY20 net sales are down -18% to 84 MEUR and EBIT is down -46% to 9.1 MEUR (10,8% EBIT margin). As a result, we expect DT to distribute 0.28 dividend compared to 0.38 last year. Our dividend estimate is at upper end of DT’s dividend distribution policy of 30-60%. Dividend could prove to be smaller, but we see this as immaterial as DT in our view is more a growth case than a dividend case.

 Global vaccine optimism and China brightening outlook

The key take from the upcoming Q4 result will be hearing management’s view on the security and medical imaging markets. DT stated in its Q3 report that it expects SBU sales to decrease in Q4, but to start improving in H1/21 driven by Chinese demand. China’s economy has recovered swiftly from the pandemic with Chinese’s GDP reaching pre-COVID levels at end of last year. China’s GDP accelerated 6,5% y/y in Q4 (Q3: 4,9% y/y), which is the fastest pace in last two years. The recovery in China coupled with the improved outlook for the battered aviation segment thanks to vaccine optimism, should provide DT with good grounds to improve on. MBU is expected to continue growing, albeit more slowly than in 2020.

 HOLD with new target price of €26.50 (prev. €22)

We expect DT to return to both revenue and EBIT growth in 2021 but estimating the pace of recovery remains challenging due to low visibility. We have not made any changes to our estimates before the Q4 report, but based on the increased confidence in market improvement, we raise our target price to 26.5 euros (prev. 22 euros) reflecting both growth and earnings improvement potential, at or above our peer group. Our target price values DT at 21-22E EV/EBIT of 27x and 19x respectively, in line with our peer group as we look for more signs of security market recovery.

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