Demant Earnings: Management Reiterates Guidance but Provides No Visual on Implants Divestment Timing

We maintain our DKK 240 fair value estimate for narrow-moat Demant DEMANT with the finalization of first-quarter results. It released preliminary revenue numbers in April when it upgraded its fiscal-year guidance with group organic growth reaching 14% year over year. We currently view shares as modestly overvalued.

Communications fell 15% organically year over year, resulting in a negative compounded annual growth rate of just under 20% since first-quarter 2021. Both enterprise solutions and gaming saw negative growth, compounding weak markets with discounting to clear out co-branded inventories. Communications is a lower-margin business than hearing healthcare in general, so management highlighted that EBIT was much higher than originally anticipated as communications shrunk as a percentage of revenue. Our model forecasts flat growth for communications for 2023 before returning to mid- to high-single-digit growth in fiscal 2024. However, we anticipate improving margins in both segments will offset the negative impact of communications growth outpacing hearing healthcare.

Hearing healthcare easily offset the decline in communications with 16% organic growth due to unit growth, product mix, and price increases in hearing aids and hearing care. Diagnostics’ organic growth slowed versus the double-digit growth seen frequently since 2021, hampered by shipment delays, but still grew 4% as China recovered through the first quarter. We believe mid-single-digit growth is a more reasonable midterm rate for diagnostics than the high growth seen during 2021 and 2022.

Management announced that there is no updated timeline for the implants divestiture since the U.K. Competition and Markets Authority voiced concerns over the level of remaining competition in the region should Cochlear acquire the segment. The firm reiterated the guidance provided in April of 6%-10% organic revenue growth and EBIT of DKK 3.8 billion-DKK 4.2 billion, slightly higher than our model’s forecasts for 2023.