Domestic and Chinese Sales Normalizing
The author is an analyst of NH Investment & Securities. He can be reached at ryan.ra@nhqv.com. -- Ed.
Dentium’s 1Q20 sales and OP likely missed consensus by 7.4% and 31.8%, respectively, with sales being directly impacted by Covid-19. However, its domestic and Chinese sales have been normalizing from 2Q20, and pent-up demand and operating leverage effects are expected in 2H20.
Downwardly adjust 2020E earnings, considering Covid-19 effects
While adhering to a Buy rating on Dentium, we lower our TP from W52,000 to W50,000. We revise down 2020E annual sales and OP by 9.2% and 17.1%, respectively, from our previous estimates, considering disruptions in operations at manufacturing plants in China following the spread of Covid-19 in 1Q20. We estimate Dentium’s EV at W556.3bn, a figure that was derived by applying a target P/E of 13.4x (a 30% discount to the average 2020E P/E of domestic and global dental implant players (Osstem Implant, DIO, Straumann Holdings, Dentsply Sirona, Danaher, Align Technology, Zimmer Biomet, and Henry Schein) to the firm’s 2020E NP (excluding minority interests) of W41.5bn. The 30% discount stems from: 1) a relatively weak cash turnover ratio; and 2) a higher possibility of write-offs for accounts receivables at domestic implant companies compared to that at global implant plays.
Expect pent-up demand and operating leverage effects in 2H20
On a consolidated basis, Dentium should log 1Q20 sales of W44.8bn (-15.8% y-y) and OP of W2.7bn (-74.8% y-y; OPM of 5.9%), with sales and OP missing consensus by 7.4% and 31.8%, respectively. Domestic sales, including implants, digital dentistry equipment, materials, etc, likely amounted to W11.0bn (-10.0% y-y, -39.3% q-q), with sales in China sliding to W10.6bn (-45.0% y-y, -62.4% q-q) due to the Covid-19 crisis. We believe that 1Q20 GPM fell 1.1%p to 66.0% from our previous estimate, as the Chinese manufacturing plant was shut down under the influence of Covid-19.
Dentium should post Russia sales of W4.8bn (-15.0% y-y), with the impact of Covid-19 being relatively limited compared to that in other regions. As Covid-19 continues to spread in the US and Europe, sales in Russia and other regions may decline. However, starting from 2Q20, sales are normalizing in Korea and China (regions accounting for a significant portion of Dentium’s sales) -- a factor that should offset sales decline in other regions. Following a likely slowdown in the spread of Covid-19 in 2H20, pent-up demand and operating leverage effects in Korea and China are anticipated.