Winning Report 2015 2.pdf


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Medtech, Switzerland

Sonova Holding AG (SOON.VX)
As of November 27th, 2014
Recommendation

HIGHLIGHTS
We issue a sell recommendation on Sonova with a target share price of CHF 122,
representing an expected downside of 16.8% on the closing price of November 27th. Sonova is
a well-managed company and possesses a market leading position within the hearing aid industry.
Nevertheless, we consider the company’s soaring multiple level – which exceeds the already high
valuation of the sector – as not intrinsically justified and therefore exaggerated.
Expectation treadmill. We take a conservative stance towards the three factors that arouse growth
expectations among market participants: a) supportive demographics: the 65+ section of population
is the fastest growing, but in developed countries growth boils down to a marginal CAGR of 2%
between 2010 and 2030; b) penetration rates: these are admittedly low but are stagnating in
developed countries (e.g. 24-25% in the US throughout last decade) and the exploitation of market
potential in developing countries requires price deductions; c) binaural fitting rates: comparable with
demographics and vary across markets, but no significant local rises have been observed thus far.
We claim that industry players and Sonova in particular will not be able to meet investors’ high
expectations reflected in current valuation levels. Our forecasted EPS figures are below analysts’
expectations for the main peers. Furthermore, the 3y share buyback program in the amount of CHF
500m (launched on December 1st) is only half of what many investors expected – an illustration of
the high expectations.
R&D imperative. Sonova’s management continously stresses the importance of research and
innovation for its future success. In view of its multi-brand portfolio, we confirm a potential to lever on
R&D. However, flagship projects such as “Lyric” and the cochlear business substantially derive from
acquisitions undertaken by the previous management in 2009/10. Moreover, the main players
shortened their product cycles throughout the last decade – now approaching two years, while R&D
spending remained stable. A confluence of increasingly complex advancements and high time
pressure provides a possible explanation. Investors’ disappointment concerning Sonova’s platform
release (Venture dual core processor) in October stands as testimony to this increasingly tense
relation.
Market approach: a double-edged sword. Besides the “special cycles” of product introductions as
strategic devices in order to buoy price levels and market shares, the group now expedites the retail
expansion and applies aggressive pricing. In fact, Sonova directly competes against independent
audiologists who still represent the most important distribution channel and appear as gate-keepers
to certain client groups. Its aggressive pricing – as reflected by selling premium products at low
prices through US big box retailer CostCo – has the potential to fuel price wars and put margins at
risk. For instance, the leading retailer Amplifon expects US independents’ renunciation of Phonak
products to reduce Sonova’s share of wallet in the single most important market by half (from 4050% to 25-30%). Furthermore, William Demant reduced its full year earnings target by 3% (EPS now
2-7%) blaming Sonova for turbulence in the US market – a possible vanguard of countermeasures.
Limited upside potential. Sonova trades at 28.9x its recent earnings and outreaches the already
high median (24.6x) of its closest peers. In the light of our intrinsic valuation and moderated
estimates of growth drivers for the industry, we expect a downward correction towards 21.4x P/E
rather than scope for multiple expansion or unexpected earnings upgrades.

Sales (m)
EBITA (%)
Net Income (%)
EPS
DPS
ROIC
ROE

12/13

13/14

14/15E

15/16E

16/17E

17/18E

18/19E

1'795
10%
6%
1.6
1.2
4%
7%

1'951
22%
18%
5.1
1.6
13%
20%

2'084
22%
18%
5.6
2.2
14%
19%

2'202
23%
19%
6.3
2.5
15%
19%

2'322
24%
20%
7.0
2.7
16%
20%

2'442
25%
21%
7.8
3.0
17%
21%

2'563
26%
21%
8.7
3.3
18%
22%

SELL
Share price (CHF)

146.6

Target price (CHF)

122.0

Downside

16.8%

General information
Ticker

SOON.VX

Exchange

SIX Swiss Exchange

Country

Switzerland

Industry

Healthcare

Sector

Equipment and service

Subsector

Medical equipment

Key figures
Closing price (CHF)

146.6

52w low (CHF)

116.4

52w high (CHF)

153.7
40’133

Avg. daily vol. (3months)

9’846

Market Cap (mCHF)

67’165

Number of shares (m)
Free float (%)

79%
41’932

Est. FY buybacks (kCHF)
Trailing P/E

28.9x

Financial year

April-March

IR website

Sonova.com

Next event

FY results, May 19th
Source: Sonova, Reuters Eikon

Business segments

Source: Sonova

Source: Sonova, Team assessment

Long-term share performance

Equity sell-offs in the
course of crisis

Resignation
of CEO, CFO
and chairman
New platform
“Venture” does not
meet expectations

German Cartel Office
blocks GN ReSound
takeover

FY guidance upgrade and
announcement of AB
acquisition

FDA approves
further implant
sales

Disappointing FYprojections: low
trading activity

Volume in 100

Share price in CHF

Delayed profit warning after
product recall and suspicions
of improper share sales: -20%

Source: Google finance, Berenberg

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