China Continues To Be a Drag on Elekta’s Revenue Growth and Installations in Q3

We are maintaining our fair value estimate of SEK 127 for wide-moat Elekta EKTA B following the release of third-quarter results. After the first half of the year saw a decrease in gross order intake and net sales at constant-exchange rates, the third quarter rebounded with 9% and 8% increases respectively year over year. We currently view shares as undervalued.

The Asia-Pacific region, which saw the highest growth at 27% in gross order intake, was also the only region to have negative sales growth in the third quarter. While the Americas and Europe, Middle East, and Africa regions both saw sales growth in the midteens, the impact of coronavirus infections in China slowed installations and resulted in a decline of 3% for the Asia-Pacific region. Despite the continuing COVID-19 limitations, solutions grew 12% year over year versus service’s 3%, and Elekta’s installed base is now approximately 7,100.

Elekta’s EBIT margin was pinched between continuing heightened supply chain, selling, and administrative expenses, as well as product mix. As a result, its EBIT margin decreased from 9.4% to 7.6% between the third quarter of fiscal 2021/22 and 2022/23. Management reported that their cost-reduction initiative saved SEK 120 million in the first nine months with the aim of saving approximately SEK 450 million yearly by the end of fiscal 2022/23. Guidance is reiterated for Elekta’s net sales growing above a 7% CAGR with continuing EBIT margin expansion through fiscal 2024/25. Our current model forecasts are in line with the company’s midterm outlook.