Detection Technology - MBU slowdown, but growth story continues
Strong growth in SBU, MBU softness in turn
DT’s Q2 result slightly missed our and consensus expectations with Q2 net sales of EUR 27.5m (+12.8% y/y) vs. EUR 28.5m/28.1m Evli/consensus estimates. Q2 EBIT was EUR 4.8m (17.5% margin) vs. EUR 5.4m/5.1m Evli/cons. SBU sales were clearly better than we expected at 19.4 MEUR (+27.4%, 17.8 MEUR Evli estimate), due to strong demand in China and increasing CT investments related to new EU and US airport standards. MBU Q2 sales were 8.1 MEUR (-11.5% y/y, 10.7 MEUR Evli estimate), which was unexpected since DT in Q1 expected both BU’s to grow in Q2. The decline was attributed to a slowdown in medical CT demand and the sooner than expected ramp down of a key customer’s product. While SBU is now in turn enjoying good demand, the softness in the medical market is expected to be temporary but continuing at least until the end of the year.
Visibility remains low, but overall investment case intact
DT revised its outlook for the rest of the year citing short visibility into customer demand and unpredictable trade politics. DT previously expected total sales to grow during the second half of the year. DT is now guiding for Q3 sales to grow above 10%. Based on the result, we have made only small changes to our headline estimates 2019 and onwards. We expect 2019E net sales to grow 13.7% to EUR 107m driven by SBU’s return to growth of 28% on weak comparables. We expect ‘19E MBU net sales to decline by -7.6% due to the ramp-down of key customer’s product in H2 and slowdown in medical demand. We expect ‘19E EBIT to be at last year’s level due to increase in R&D spending, increasing share of SBU sales affecting the mix, as well as increased pricing competition in both segments.
Strategy update for 2025 period, no change to medium-term financial targets
In conjunction with the result, DT announced its updated strategy until 2025. The company's new strategic target is to be the growth leader in digital x-ray imaging detector solutions and a significant player in other technologies and applications where the company sees good business opportunities. The company estimates that the market for digital x-ray imaging detector solutions will be around EUR 3 billion in 2025. DT’s previous strategy until 2020 was based on being the leader in computed tomography and line-scan x-ray detectors and solutions. The total market, as per the company's previous strategy, is estimated to be around EUR 700 million in 2020. Given DT’s current estimated 2019E sales of above 100 MEUR, it’s fair to say that DT is a leader in the scope of the previous strategy. The new 2025 strategy’s market scope is broader, but DT’s medium-term financial targets remain unchanged; sales growth at least 15% per annum and operating margin at or above 15% in the medium term.
DT is well positioned to benefit from digitalization since the company’s product portfolio already consists of digital radiography products that are used in digital X-ray solutions. There are also new emerging technologies (e.g. CMOS, multi energy) that DT has invested in with the strategic goal to be the growth leader when the emerging technologies become more adapted. To our understanding, the security X-ray equipment manufacturers have been quick to adopt digitalization. However, medical and industrial equipment manufacturers are at an earlier stage of adopting the technology.
BUY recommendation maintained
On our estimates, DT is trading at discounts on EV/EBIT and P/E multiples for ’19-20E. Although visibility is short and trade politics unpredictable, we see longer term investment case intact and therefore discount unjustified. With our estimates broadly intact, we maintain our BUY recommendation with target price of 23.5 euros. Our target price values DT at EV/EBIT-multiple of 16x and 13x on our ‘19E and ‘20E estimates, which is still clearly lower than peer group despite DT’s strong metrics.