Boule Diagnostics
Boule Diagnostics - Solid Q2 sales; margins get the squeeze (ABG Sundal Collier)

2019-08-21 18:18
Sales trajectory persists while margins remain pressured
Adj. EBIT revised by -8% in 2019e
’19e EV/EBIT of 13x is 24% below its historical average
Weaker quarter with continued margin pressure
While the good sales trajectory continued from Q1, with organic growth of 5% in Q2, reported EBIT amounted to SEK 5.9m for a margin of 5.0% (vs. ABGSCe of SEK 8.9m). Instrument sales grew by 15%, while own consumables generated 5% growth. The main deviation to our forecast was the substantially lower gross margin of 43.4% (vs. 46.1% ABGSCe). The main factor behind the softer figure was a continuing unfavourable regional mix, primarily caused by instrument sales to low-margin markets such as India and Latin America. In addition, distribution of free RFID upgrade kits to certain markets put some additional pressure on gross margins (~SEK 1m). Also, opex included the already announced bad debt provision of SEK 5.9m, and the adj. EBIT margin was thus 9.8%. According to management, the process to meet the FDA’s requirements is progressing according to plan, as indicated by an on-site inspection from the FDA in July.

Lower margin assumptions drive neg. ’19e EPS, EBIT cuts
Management states that it is continuing its efforts to improve margins; among them are manufacturing cost reductions and price increases. Even so, our assessment is that gross margins will remain under pressure for the short term with the current mix. We leave our sales forecasts intact, but lower our gross margin assumptions, leading to adj. EBIT and EPS revisions of -8% and -16% for ‘19e, respectively.

Stable growth bodes well for earnings to bounce back
Boule has now experienced negative earnings growth in the last four quarters and the share has subsequently underperformed (-25% YTD and -58% in one year). That said, comps are now starting to get easier, and we expect earnings growth to be back in H2’19. At the current share price, the Boule share is trading at an EV/EBIT of 13.3x for ‘19e, which is 24% below its his
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