Detection Technology - Growth to drive margin expansion

DT’s Q4 results topped estimates as costs remained under control while SBU continued to drive growth. MBU outlook is still challenging in the short-term, but valuation isn’t too demanding assuming MBU returns to growth later in FY ‘24.

Earnings beat estimates, Chinese MBU market remains soft

DT’s Q4 revenue was up 11% y/y to EUR 31.3m vs the EUR 30.4m/30.6m Evli/cons. estimates, driven by SBU while the Americas and APAC regions both grew. Americas grew 57% y/y as aviation demand continued to recover, and India was able to offset the softness in China. All three units gained and sales mix was more favorable y/y. The EUR 4.6m EBITA topped our EUR 4.2m estimate as staff costs were lower than estimated. DT expects only stable H1 revenue as Chinese markets remain challenging; MBU is to decline whereas SBU and IBU should grow at double-digits.

MBU shouldn’t find it too hard to return to some 5% CAGR

Destocking still impacted IBU, but the unit’s organic outlook has stabilized whereas the Haobo (DTS) acquisition supports growth within TFT flat panel detectors. DTS will also require capex, which should increase to around EUR 4-5m this year. Fixed costs are to remain roughly flat in FY ’24 while gross margin improves. DT has also been able to get its net working capital position under control and hence growth from here on supports cash flow. H1 growth is likely to remain quite modest at low single-digits as the MBU market in China continues to drag, but SBU and IBU are positioned to post double-digit growth in H1 as well as H2. Aviation demand will still be the major growth driver throughout this year, whereas H2 should again see double-digit growth as the Chinese MBU market stabilizes. This would already lift DT to perform in line with its 15% profitability target. Valuation isn’t therefore very challenging so long as MBU returns to around 5% annual growth.

14x EV/EBIT not too demanding as 5-10% CAGR resumes

We trim our growth estimate for the year, while our relative profitability estimates increase a bit. We still estimate EUR 6m EBITA improvement for FY ’24; valuation has gained to 14x EV/EBIT on our FY ’24 estimates, which we don’t yet view too demanding as it continues to represent a discount to peers while there’s additional upside potential to DT’s FY ‘25 earnings due to the MBU business. Our new TP is EUR 17 (16) as we retain our BUY rating.

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