Detection Technology - Looking past the air turbulence

Detection Technology’s Q3 report was below expectations as SBU continues to struggle under the pandemic. Despite low visibility and the uncertainty related to aviation, we see security market weakness as temporary and do not see DT’s competitive position, strategy or longer-term drivers compromised. Therefore, we see DT well positioned to perform again once security market normalizes. Despite our estimates cut, we maintain our target price of 22 euros and HOLD rating.

Clear miss due to worse than expected SBU performance

DT’s Q3 result missed our and consensus expectations as SBU continued to struggle due to the ongoing pandemic, which is postponing investments in security market, especially airports. DT’s Q3 net sales were EUR 20.6m (-23.4% y/y) vs. EUR 24m/23.5m Evli/consensus estimates. SBU sales declined -43% to EUR 10.6m (EUR 13.5m our expectation) due to COVID-19 affecting the demand for security X-ray devices. MBU sales increased +20% to EUR 10.1m (EUR 10.5m our expectation) due to continued strong demand in medical CT imaging. DT’s Q3 EBIT came in at EUR 2.6m (12,6% margin) vs. our estimates of EUR 4m (EUR 3.4m cons).

 DT cautiously optimistic that worse is behind it

The COVID-19 pandemic is negatively affecting the demand for X-ray devices in all DT’s target markets, apart from medical CT imaging. Apart from domestic air transport in China, global air transport has failed to recover, which has led to exceptionally low demand in aviation. In addition, extensive restrictions on mass gatherings has negatively affected demand in security applications. DT expects SBU sales to decrease in Q4, but to start improving in H1/21 driven by Chinese demand. DT expects MBU sales to grow in Q4 and to continue to grow in Q1 of 2021, albeit more slowly than in 2020.

 Maintain HOLD with target price 22 euros

Based on the report, we have cut our sales and EBIT estimates for the coming years. On our renewed lowered estimates, DT is now trading at premiums to our peer group, but we note that there is high uncertainty in our estimates and multiples can quickly change when security market recovery starts. It’s difficult to estimate how long the challenging situation regarding aviation will continue and at what point SBU will start recovering. We do not however see DT’s competitive position, strategy or longer-term drivers compromised, and therefore DT should be well positioned to perform again once security market normalizes. Until we see some signs of security market stabilizing, we remain cautious. We maintain our target price of 22 euros and HOLD rating.

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