Demant: Maintaining FVE as Hearing Healthcare Offsets Negative Communications Growth in Q1

We are maintaining our DKK 240 fair value estimate for narrow-moat Demant DEMANT as it raises fiscal-year 2023 guidance on the back of a strong first quarter. With first-quarter revenue up 14% organically, fiscal-year revenue guidance is raised to 6%-10% and EBIT raised by DKK 200 million to DKK 3.8 billion-DKK 4.2 billion. Hearing healthcare grew 16% organically year over year with another 4% in growth supported by the acquisition of Sheng Wang, showing stronger continuing COVID-19-recovery than anticipated. We currently view shares as fairly valued.

Demant has been clawing back market share in the Veterans Affairs channel since its single-digit low during COVID-19, and we forecast the approval of Oticon Real for the May contract will boost hearing aid revenue in the second half of fiscal 2023. However, the positive ASP development Demant saw in the first quarter is unlikely to be a long-term contributor, in our opinion, given our view that China and emerging markets will grow and drag down the hearing aid ASP.

Hearing Care was boosted by the Sheng Wang acquisition to 17% revenue growth in local currency from 9% organic growth, higher than our model forecasts of mid-single-digit growth in the next five years. China’s delay in reopening until December 2022 and the spike of infections following has extended the release of pent-up demand for hearing aids and care into 2023. We expect the rest of the first half will also see heightened demand before trailing off to more sustainable growth levels.

Communications continued to drag on overall revenue growth, down 15% organically in the first quarter. This wasn’t unexpected, but we anticipate that second- and fourth-quarter revenue will reflect less negative numbers as people prepare for the summer and winter holidays with gaming headset purchases. We anticipate relatively flat growth in the segment for the fiscal year due largely in part to the pull-forward of communications gear during COVID-19 and the product lifecycle.