Detection Technology - Coronavirus could pose near term threat to our estimates

Detection Technology will report Q4 earnings next Monday, February 10th. As majority of DT’s production and personnel is located in China, with Asia representing some 2/3 of DT’s total net sales, the effects of the coronavirus will be a key focus. Despite possible headwinds related to coronavirus, we remain positive to the investment case. Our rating and target price of EUR 24 remain intact ahead of Q4.

Q4 wraps up a year of decent growth

The security imaging market has been experiencing strong demand due to increasing CT investments related to new EU and US airport standards, while medical imaging market is going through a temporary slowdown. For Q4’19, we estimate SBU growing 23% and MBU declining 14% y/y, with total Q4 net sales growing 8% y/y to 27.7 MEUR (27.4 MEUR cons). Our Q4 EBIT estimate is 5.1 MEUR (4.7 MEUR cons), which is +15% compared to slightly low comparison figures of 4.4 MEUR in Q4’18. On a whole, we expect FY’19E sales growth of 12% (FY’18 5.5%) and flat EBIT growth due to increasing R&D investments and lower MBU sales and share in mix. Our DPS estimate is 0.38 (0.39 cons.), which is on par with last year’s dividend due to flat net profit growth in 2019.

Growth story to continue despite coronavirus posing a near term threat

DT usually doesn’t give full year guidance due to low visibility into customer demand. We look forward to hearing about the latest status of the medical imaging market and the effects of the coronavirus. Most of DT’s production and ~80% of personnel are located in China, with Asia representing some 2/3 of DT’s total sales. Our FY’20E sales growth estimate is +15% based on continued good growth, especially in China, and volume ramp-up of new Aurora and X-Panel CMOS products. Despite continued R&D spending, we expect EBIT improvement 2020E due to increase in sales 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.

Rating and TP of 24 euros maintained ahead of Q4

Despite the short visibility and possible headwinds related to coronavirus or trade politics, we see longer term investment case intact due to strong market drivers, especially in China, as well as DT’s compelling strategy and execution capabilities. Our estimates, as well as our rating and target price of 24 euros remain unchanged ahead of the Q4 report.

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