Elos Medtech
Elos Medtech - Declining demand and production disruptions (ABG Sundal Collier)
2020-04-03 06:42
COVID-19 impact in both China and Europe
’20 EBIT estimates down 38%, margin -260bp
Capital-intensive growth a challenge
Covid-19 double whammy, H1’20 to leave serious EBIT dentElos Medtech’s Q4’19 report highlighted the temporary shutdown of its Chinese facility due to the COVID-19 pandemic and its impact on sales and earnings in Q1’20. While operations in China are now up and running, further headwinds from COVID-19 are spreading over Europe and we expect it will hurt Elos Medtech significantly over H1‘20e. Weakening demand and changing healthcare needs have resulted in the group making temporary layoffs within its Nordic production operations. The group has decided to cut its dividend of SEK 1.5/share.
’20 EPS estimates down 48%, EBIT margin 7.3% (-260bp)
We cut our sales estimates for ‘20e by 16%, and expect organic growth of -11% for the full year. The lion’s share comes in H1’20 (Q1 -20%, Q2 -24%), where in addition to COVID-19 we note that comps are challenging for the period. We expect additional costs related to logistics and lower capacity utilisation to make a significant dent on margins in H1’20. We lower our ‘20e EBIT estimate by 37%, resulting in a 260bp margin decline to 7.3% (10.0%). In Q1 and Q2’20, we expect EBIT margins of 6.3% and 5.0%, respectively. In H2’20e we price in a gradual recovery and expect EBIT-margins around 8-9% and flat sales growth.
Capital-intensive growth, costly in current environment
Elos Medtech has a history of capital-intensive growth. Ongoing projects include the expansion of its Skara facility (ABGSCe capex shows a SEK 40m investment). The company has SEK ~280m in interest-bearing debt, but the lion’s share of maturities are three or more years ahead in time. That said, we do not rule out the possibility of breaching covenants in ‘20e. Following our estimate revisions, ‘20e ROCE is 5% and ND/EBITDA 2.9x; the share is trading at 19x ’20e EV/EBIT, down to 13.4x by ‘21e. We lower our valuation range in line with estimates to SEK
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