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Detection Technology - Corona related bump in the road

DT’s Q1 result clearly missed expectations due to weaker than expected demand and profitability development caused by COVID-19. DT expects weakness in SBU sales to continue throughout the year, while MBU is enjoying good momentum. DT is well positioned to weather out the corona storm and its competitive position with new products remains good. We have lowered our estimates for 2020e and based on the estimates cut, we lower our target price to 22€ (prev. 24€) but maintain BUY recommendation.

Corona pandemic affecting SBU demand and profitability
DT’s Q1 net sales amounted to 19.9 MEUR (-13.6% y/y) vs. 22.2/22.0 MEUR Evli/consensus estimates. Q1 EBIT was 1.2 MEUR (5.9% margin) vs. 2.8/2.6 MEUR Evli/cons. R&D costs amounted to 2.6 MEUR or 13% of net sales (11% Q1’19). SBU had net sales of 11.5 MEUR vs. 14.2 MEUR Evli estimate. SBU sales declined -20% y/y, mainly due the COVID-19 pandemic. Both air and land transport decreased from 30 to 90% in different segments. MBU delivered net sales of 8.4 MEUR which was in line with our estimate of 8.0 MEUR. Net sales of MBU decreased by -2% y/y due to the expected softness in the CT market outside China at the beginning of the year, and the ramp-down in production of a product family started by one of DT’s key customers last year. The COVID-19 pandemic increased demand in CT applications towards the end of Q1, but relatively high comparison figures led to the overall development in net sales remaining negative.

Mid-term fundamentals remain good for both BU’s
DT expects lower demand in the security segment to continue in Q2 and SBU sales to decrease in 2020. DT sees that despite the short-term challenges in the aviation segment, ECAC C3 standard equipment upgrades will continue at European airports, but the deadline for CT machine installations will be probably extended by 6-12 months. The CT upgrades in the US have continued, however a slight delay is expected for future purchases. China is also preparing similar standardization and has informed earlier that they will publish details by the end of 2020. On the other hand, MBU sales is enjoying better momentum as CT imaging is used to detect pulmonary changes caused by the COVID-19 virus, as well as in the diagnosis and treatment of patients. DT sees demand in medical CT applications remaining at a good level also in H2 and MBU sales to increase in 2020.

Investment story remains attractive despite bump in the road
Based on the report, we have cut our 2020e sales and EBIT estimates by 8% and 23% respectively, while keeping our 2021-22e estimates broadly unchanged. We expect SBU sales to decline -13% from last year’s highs and MBU to grow 17%, resulting in 2020e net sales to decline -3% and EBIT of 13 MEUR. On our revised estimates, DT is trading at 19x and 13x EV/EBIT multiples for 20E-21E. Valuation picture is now more mixed as 2020e metrics will be clearly lower due to the pandemic, and growth and profitability should resume in 2021e. DT is now trading on slight EV/EBIT premium on our 2020e estimates, but on a 12% discount on our 2021e estimates. Although 2020e will be challenging, DT is well positioned to weather out the storm and its competitive position with its new products remains good. Therefore, we continue to see DT as an attractive investment story given the strong longer-term drivers, especially in China, as well as DT’s compelling strategy and execution capabilities. Based on the estimates cut, we lower our target price to 22€ (prev. 24€) but maintain BUY recommendation. Our target price implies EV/EBIT multiple of 15.5x on our 2020e estimates, broadly in line with our peer group.

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