Investeringskommentar, Alex Morozov, Regional Director, 1/3/2016
William Demant provided full-year results in line with our forecasts. We are maintaining our fair value estimate and narrow moat rating, and we believe the shares are fairly valued at current levels. The company delivered 14% reported growth, 7% in local currencies, driven mainly by hearing aids and the Audika acquisition. In the hearing aids segment, performance was particularly strong in the North American market, with robust organic growth in the independent segment. The company delivered a 7% unit growth in the United States, with independents growing 8% and Veterans Affairs up 5%. Despite relatively strong growth in the VA, the company's market share within the VA remains at around 8%; considering that WD will not be able to introduce its new platform into this end market until later in the year, we expect its market share to remain under duress, particularly from Sonova. In Europe, the firm increased its market share with the NHS in the United Kingdom, but saw challenging growth in Germany (mainly because of tough comps). Gaining share in the NHS is a double-edged sword: The firm's pricing suffered as a result of the NHS taking a greater portion of the revenue. Overall, revenue growth in hearing aids was in line with our assumptions.
Implants grew in line with the underlying market rate, which WD expects to accelerate in 2016 and beyond. Neuro, the firm's brand new implant, is prelaunched in four countries, and the success of this product will ultimately determine the company's chances in the cochlear market, which is dominated by larger players, particularly Cochlear. Diagnostics were weak in the second half of the year, mainly owing to low tender activity level in Eastern Europe; adjusted for Russia, this business grew 4% in local currency.
The company's guidance on the top line was conservative, with "fierce competition" cited as the main reason behind roughly flat market growth in hearing aids. EBIT expectations are in line with our forecasts.
Bulls Say
- Approximately 16% of the world's population suffers from mild-to-severe hearing loss, expected to grow to 20% during the next decade. Even in developed countries, penetration rates only reach 20% on average.
- Demant's roll-out of the new product lineup in all of its tiers could result in a market share pickup, particularly in the U.S. independent channel, which is unhappy with Sonova's Costco strategy.
- Emerging markets represent a robust, albeit longer-developing, opportunity for William Demant, given the rising middle class and the currently low adoption rate of hearing aid technology.
Bears Say
- ASPs suffered significantly in 2014 due to significant demand in the German market of Demant's low-end devices. Germany will be a volume headwind in 2015.
- While Neurelec acquisition gives Demant an implant business, the firm is a distant fourth in terms of its market positioning in this segment.
- Participation in the U.K.'s National Health Services program is beneficial to revenue but detrimental to ASPs, as NHS includes mainly lowend devices in its program and demands notable discounts from manufacturers.
