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Detection Technology - Growth translates to earnings gains

DT reports Q1 results on Apr 25. Q1 may have been a bit muted, but growth is likely to pick up pace over the year. We see significant earnings upside for this year and next.

SBU’s growth trend should extend for another two years

DT saw FY ’23 profitability gain by more than EUR 3m as the double-digit growth of SBU drove higher top line while costs remained under control. We expect FY ’24 to look not that different relative to previous year as SBU will still be lifted especially by airport CT investments (the trend should last until 2026). MBU, however, only remained flat last year and we expect H1’24 to be challenging for the segment as the Chinese anti-corruption campaign continues and price competition stays stiff. We believe the MBU headwind will not allow DT’s top line to grow much in H1’24 even when SBU still grows at a double-digit rate while the outlook for IBU starts to look better as destocking should soon be over (although the food industry’s relatively quiet activity levels mean Q1 will remain rather muted on an organic basis).

Q1 may be rather flat, but growth should continue from Q2

We estimate Q1 adj. EBITA to have improved only slightly y/y to EUR 1.6m, however we expect earnings growth to steepen over the course of the year assuming SBU’s double-digit rate persists while both MBU and IBU start to pick up. We estimate FY ‘24 MBU revenue to decline 2%, but the 15% growth we see for both SBU and IBU should help DT to a high single-digit growth this year. We thus expect adj. EBITA to gain by EUR 5m, which implies a margin of 13%. SBU may have grown to be the largest segment by the end of next year, which should also improve product mix and margins. DT would hence have further earnings upside next year when all three segments may show meaningful growth.

Attractive upside as EBITA margin can gain some 500bps

We estimate DT’s growth to accelerate towards FY ’25 since the drivers of SBU remain solid whereas MBU and IBU have room to improve as demand normalizes. The 9% growth we estimate for next year could lift EBITA margin above 15%, which would mean another EUR 4m earnings gain. DT is valued no more than 14x EV/EBIT on our FY ’24 estimates, a discount of 30% relative to peers. The multiple is only some 10x for FY ‘25; we see significant long-term upside as we retain our EUR 17.0 TP and BUY rating.

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