Shares Undervalued Given Brisk Earnings Growth
The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. -- Ed.
We raise our TP on Dentium to W120,000. Dentium posted a consolidated 2Q22 OP of W35.2bn, topping consensus. We project its 2022 OP at W136.1bn (OPM of 35.1%). While the company’s OPM hovers at a similar level to that of Biopharma CMOs, its 2022E P/E sits at just 25% of the figure for Straumann, which offered 2022 annual sales growth guidance of only 10%.
Logs astonishing OPM of 36.4%, likely not a one-time performance
We raise our TP on Dentium by 20% to W120,000, as we hike our 12-month forward NP projection from W85.1bn to W94.5bn and apply a target P/E of 14x.
Dentium reported consolidated 2Q22 sales of W96.7bn (+33% y-y) and OP of W35.2bn (+109% y-y) for an earnings surprise. The strong performance was driven by solid sales growth in China (+22% y-y), Russia (+76% y-y), and India (+233% y-y). Of note, forex effects contributed only 3~4% to sales, as all direct sales and the majority of dealer channel sales in overseas markets are accounted for in the local currency. For China, the largest export destination, sales break down as direct (60%; RMB only) and dealer (40%; majority RMB).
We forecast Dentium’s annual 2022 sales at W387.8bn (+33% y-y) and OP at W136.1bn (+95% y-y). Although 3Q22 sales will likely fall slightly q-q due to slow seasonality, 2H22 sales should climb 27% h-h on the back of strong seasonality in 4Q22. In 2Q22, bad debt expense totaled W5.7bn (6% of sales) amid conservative management. We expect the figure to fall to 4% in 2H22. Ad expense came to W3bn, the lowest level over the past two years; similar low levels should sustain in 2H22.
OPM widening; shares undervalued given brisk earnings growth
With a strong widening (y-y) in OPM appearing in 2Q22, it will be important to monitor whether this trend sustains in the current inflationary environment. Following a dramatic turnaround in 1Q22, Dentium’s OPM further improved to 36.4% in 2Q22. With recent inflation woes now being a general concern, we point out that the firm’s cost load is somewhat insulated by its high sales portion for implants (83.5%). In keeping, we believe that the pace of Dentium’s OPM improvement is outshining that at its dental implant competitors.
We see 2022E OPM of 35.1% and 2023F OPM of 38.3%, levels higher than the projected averages for biopharma industry CMO players (who carry lofty P/Es). Despite this rosy outlook, Dentium’s shares are currently trading at a 2023F P/E of only 8x. Of note, Straumann, the global number-one dental implant player and a major rival to Dentium in EMs, presented sales growth guidance of 10% over 2Q22~4Q22, but its valuations have surged to the most demanding levels (2022E P/E of 40.7x) in the healthcare sector since mid-June.