China is burdening the 2023/24 performance, but is not alone

Healthineers reported a decent set of figures beating the consensus (sales: +3.2%; adjusted EBIT: +3.3%) setting the stage for 2023/24. While the guidance might look somewhat unambitious, in our view it is realistic. One big topic of interest was the management’s explanation as to how it sees the future of Diagnostics within the group. #When asked whether this points to some kind of spin-off, the management confirmed that it is focused on transforming the division and anything else would be a

Strong business performance

Despite the strong profitability momentum in the operating segments, except for the expected moderation in Diagnostics, the management’s guidance is now for the lower end of the adjusted EPS guidance owing to the end to the central banks’ cheap money policy which is starting to negatively impact Healthineers’ P&L. We expect the company to deliver a strong Q4 and, in our view, the investor disappointment (shares down ~ -7%) is overdone.

Negative impacts from Corindus

We were never believers in the Corindus acquisition, fearing that it was too expensive. Healthineers has now booked some €-330m to focus the endeavour’s application area, writing off ~25% of the purchase price. On the other hand, the operating business is performing well, benefiting from the recovery of geographies, especially China, after the pandemic. it was clear to us that this would not be a good year for Diagnostics for many reasons.

A good start to the year...

...but Q2 will be impacted by some negatives (low antigen test sales; lion’s share of Diagnostics’ restructuring costs). For the FY, management has spread a lot of optimism backed by the strong order book, which is a consequence of the company’s innovative portfolio. The Q1 figures of Healthineers were a mix set of figures and missing consensus (sales: -2.5%; adjusted EBIT: -2.4%). Our expectations were only just beaten (sales: +0.2%; EBITDA: +0.5%), which can be partly explained by lower than

A very smart move!

Healthineers has diligently invested its boom-generated money in the future growth of its Diagnostics business. This has come at a price of the division’s lower organic growth and margin expectations during the ‘restructuring period’ through to 2025. The good news is that the group’s targets until 2025 remain in place as the other divisions could compensate for Diagnostics’ weaker contribution. Healthineers reported a strong Q4 with consensus-beating figures (revenues: +3.1%; adjusted EBIT:

A set of red and yellow lights …

… after a bag full of green ones a year ago made Healhineers’ Q3 figures look a little odd. Nevertheless, they were a notch better than expected despite missing the consensus at the profitability level (sales: +0.5%; adjusted EBIT: -5.0%). In addition to Chinese lockdowns, the company sees supply chain issues as a temporary effect which is going to ease in the coming months. These effects might not be fully offset in Q4, but it is expected to report the strongest top-line.

Strong growth despite headwinds

It was a smart decision to rapidly develop a rapid antigen test for the detection of Cobid-19 back in 2020. The test having since become available in the US, sales grew significantly in line with infection rates. Test sales will decline in H2 as the planet seems to be moving from a pandemic to an endemic situation although the underlying businesses are expected to recover strongly over the forecast period. Consensus was beaten by +4.1% on the top-line and adjusted EBIT by +6.9%.

Quickstart into 2022

Healthineers reported a consensus-beating start to the FY (sales: +31%; adjusted EBIT: +22%) due to the good development across the established portfolio. Antigen tests stood out by already overrunning FY guidance in the first quarter. However, not everything was perfect. Real life data show gross margin pressure and higher operating costs. The good news was Healthineers could deliver its products to customers, which could not be said for all competitors. Q1 figures were above our estimates.

Reinvested profitability gains boost dynamics towards 2025

Healthineers held an impressive virtual investors day when it provided further insights to each division and gave first glimpses of how management thinks the new foursome should work. The most interesting point was the cross-fertilisation between the divisions, especially Imaging and Varian, but management could have been more specific in our view. However, enough light was shed to foster our view on Healthineers.

Profit sharing’s big bite

Healthineers’s Q4 figures were strong at the top line, but subdued when it came to profitability. Its business model includes a certain profit sharing with sales representatives, which strongly weighed on the group’s profitability as it sallied out of the pandemic. Management’s way of presenting the results as well as giving guidance makes it difficult for quick comparisons. Reported figures were mixed, beating consensus +2.8% at the top line, but missed it by 3.2% at the adjusted EBIT.

A nice year-end finish?

In light of the Delta and the emerging Lambda variants, the testing challenge has become wider as the questions have shifted from positive to how high. We believe the former is still valid, but the latter is also meaningful against the background of boosters. We believe Healthineers has done well, especially in Diagnostics in 2020/21, as COVID-19-related testing will not go away in the short term but its contribution will be lower in 2021/22.

Siemens HEALTHINEERS

Healthineers did better than expected by us and clearly beat consensus (top-line: +10.2%; profitability: +20.5%). The strong development was primary driven by the diagnostics boom, which made Healthineer a strong and obligatory player. Like every boom, the effect will phase out in the coming quarters. Varian, the new kid on the bloc, made the expected strong contribution, whereas the other divisions reported the usual temporary volatility.

Rocking Diagnostics

Based on the strong demand for its COVID-19 antigen test as well as for Imaging’s consumables and the closing of the Varian acquisition, management lifted its organic sales growth assumptions as well as its EPS ones. Reported Q2 figures were in line with our expectations, but consensus was beaten by +2.4% at the top line, but missed by -4.6% on the adjusted EBIT level. The company significantly increased its operating CF due to good working capital management.

Could 2021 really become a stronger year?

Healthineers lifted on the back of the strong performance in Q4 of CY 20 and its FY guidance. But one of the drivers, if not more, look slightly fragile to us: normalisation of the underlying business. The latter might be really attributable to the more machine-related divisions, but for Diagnostics we have some doubts. Released preliminary figures were stronger than expected and also beat consensus.

Some believe in 20/21

Management radiated optimism during the conference call pointing to the strong order backlog and hopes in the pickup procedures. The Q4 figures were impacted by the ongoing dearth of elective procedures burdening the Diagnostic margin and Advanced Therapies suffering from higher costs for Corindus. Nevertheless, the FCF was strongly higher. These results beat our cautious expectations and were slightly above consensus. The dividend proposal was however below our forecast.

Warpaint London+ (W7L, House Stock at 375p) - Trading ahead of expectations - +10% upgrade implied

The Hardman & Co Monthly: April 2024

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LIBERUM: Futura Medical: An increasing degree of confidence

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Morning Note – 12 February 2024

Trinity Delta Lighthouse: Futura Medical

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Warpaint London + (W7L, House Stock at 382p) - Late-year sparkles– another double-digit upgrade to FY23F EPS

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