Detection Technology: Continued air turbulence ahead - Evli Research
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Detection Technology: Continued air turbulence ahead - Evli Research

Decent quarter considering circumstances

Given the ongoing pandemic affecting especially DT’s security business, DT delivered a decent and broadly in-line Q2 operating result despite a quite significant drop in net sales. Q2 net sales amounted to EUR 21.1m (-23.2% y/y) vs. EUR 25m/25.3m Evli/consensus estimates. Q2 EBIT was EUR 2.6m (12.3% margin) vs. EUR 1.9m/3.0m Evli/cons. R&D costs amounted to EUR 2.7m or 12.7% of net sales (Q2’19: 2.9m, 10.7%). SBU had net sales of EUR 11.2m vs. EUR 15.2m Evli estimate. SBU sales declined -42.1% y/y, mainly due the COVID-19 pandemic affecting the demand for security X-ray devices. MBU delivered net sales of EUR 9.9m which was in line with our estimate of EUR 9.8m. Net sales of MBU increased by +22.5% y/y due to continued strong demand in medical CT imaging.

Short term visibility poor with aviation segment weighing on SBU

DT continues to expect lower demand in the security segment to continue in Q3 and SBU sales to decrease in 2020. DT however sees SBU sales starting to improve towards end of the year. DT estimates airport CT standard equipment upgrades in Europe and U.S. to be postponed at least 12 months. Regarding China, it remains unclear when similar Chinese airport standardization will start and if any security infrastructure related government recovery measures will take place. The situation regarding aviation remains the biggest near-term uncertainty for DT. We estimate aviation to contribute roughly half of SBU net sales. That said, -42% drop in SBU Q2 net sales is a relatively good performance given that aviation grinded almost completely to a halt in Q2. MBU sales growth is expected to continue in H2, although product mix is likely to shift from basic CT devices to more high-end devices, which should support MBU margins further.

Maintain BUY recommendation with TP of 22 euros

Based on the report, we have trimmed our 2020E sales and EBIT estimates by 7% and 4% respectively. We expect SBU sales to decline -23,5% from last year’s highs and MBU to grow +18%, resulting in 2020E net sales to decline -10% and EBIT of 12.5 MEUR. We have increased our sales growth estimates for 2021-22E to account for postponement of CT standardization related upgrades. On our revised estimates, DT is trading at 19.8x and 13.6x EV/EBIT multiples for 20-21E, some 10-20% below our peer group now that peer multiples have rerated since DT’s Q1 report. Although 2020E will be challenging, we see that DT is well positioned to weather out the storm and its competitive position with its new products remains good. Therefore, we continue to see DT as an attractive investment story given the strong longer-term drivers, especially in China, as well as DT’s compelling strategy and execution capabilities. We maintain our target price of 22 euros and BUY recommendation. Our target price implies EV/EBIT multiple of 16.4x on our 21E estimates, which is still ~7% below peer group.

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