Doro
Doro - Flat sales but solid EBIT growth expected (Introduce)

2019-10-07 16:36
Q3e: +1% sales growth and 12% EBIT growth
Gross margins shrinking q-o-q, but up 1.4pp y-o-y
7.4x EV/EBIT adj. ’20e, at 10% FCF yield
Q3’19e: SEK 515m in sales and SEK 37m in EBIT
We anticipate that Q3’19 (to be reported 25 October) has been a quiet quarter in terms of market activities. We have not seen any new significant public tenders (related to Doro’s Services business), nor have we noted any trend shifts on the phone market. Even so, Doro ended Q2 with a strong order book of SEK 450m, which we estimate will require the Products division to generate sales of SEK 420m in Q3 (-1.4% y-o-y of which -4.8% organic and +2.4% FX). Although Doro has recently made new product releases, these occurred at the end of the quarter, for which we do not expect any significant contribution in Q3. For Services, we forecast sales of SEK 95m. This corresponds to +16% y-o-y growth, of which 8% stems from the recently acquired UK-based company (Invicta Telecare) that was consolidated as of September.

Gross margins are likely to come down vs. Q2’19
In Q2’19, gross margins in Products and Services were 32% and 46%, respectively. Due to a continued trajectory of unfavourable FX trends and pressured Services margins owing to product mixes, we expect these to contract to 30% and 45.8% in Q3’19. As we highlighted in our 4 Sept. 2019 note, “Acquires the competitor”, Invicta’s financials are gross margin-dilutive compared with Doro’s. Furthermore, we believe that the acquisition will entail non-recurring costs for Doro in Q3. This trickles down to estimated group EBIT of SEK 37m, corresponding to 7.2% EBIT margin. Our estimate changes (+2-3% on ’19e-’21e EBIT) reflect recent FX movements combined with fine-tuned gross margin revisions.

We assess that investors pay 3x ’20e EV/EBIT for Products
Doro is in the process of transforming into a telecare company, with ~20% of sales currently stemming from Services. Increased Services sales means improved group margins, increased revenue stability (recurrin
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