Dignitana Q3: Stronger Conviction
Redeye Research Note 2020/11/19
Total revenue in Q3 amounted to SEK 12.6 (10.4m), corresponding to an increase of 21% in SEK. We did expect higher net sales at 11.5m vs. reported 10.9m; however, other income made total revenue higher than expected. The Covid-19 situation will continue to affect the numbers as we advance; however, we see that the business is quite more resilient than expected. Growth will likely also continue to vary between quarters as the DigniCap is in an early commercialization phase. The decrease in installations in the second quarter affected the third quarter, but there are signs of increased deliveries during the fourth quarter. This has to be monitored going forward as we are again going into a difficult period with Covid-19. However, next year will most likely be considerably better.
The gross margin was 62% (68%) (excluding other income). The outcome was lower than our expectation of 70%. We are cautious interpreting results from a single quarter in the current environment and early in the commercialization phase.
OPEX decreased by 3%, resulting in EBIT of SEK -9.5m (-9.9m). Although very much in line with our expectation of SEK 9.3m, the external costs were again lower than expected at (SEK -6.0m vs. SEK -9.5m), mainly explained by lower travel and trade show costs. The personnel expenses were in line with our forecast. The external costs are likely to bounce back during 2021 when operations return to a more normal situation. Therefore, we do not change our expectations of an increase of the external costs going forward. The US’s development regarding the CPT codes also indicates that a higher level of costs is reasonable going forward.
The total cash flow was SEK 7.1m (29.1m), and the company had a cash balance of SEK 14.8m at the end of the quarter.
The Average Daily Treatment Revenue (ADTR) reached SEK 107t (101t), which represented an increase of 7 % over the same period in 2019 while a decrease from the second quarter of 15%.
We remain optimistic about the long-term growth prospects. The Q3 report continued to show a stable development, and clinics’ pathway to utilize the reimbursement system with the CPT codes in 2021 looks promising. Several steps are left in the process, but they will most likely increase the interest in scalp cooling during 2021. The partnership with ION Solutions will also become a growth driver going forward, and there are already signs that there is progress made under this agreement.
Despite the Covid-19 challenges, we believe that Dignitana has laid down the groundwork for a period of strong growth when Covid-19 effects subside. The CPT codes can be a real game-changer and have strengthened our conviction in our long-term growth expectations. We only make minor adjustments to our estimates from 2022 and forward since we have already factored in significant growth.
However, we have also gone through our rating system for the company, which, together with a change in the risk-free interest rate to 1% from 2%, lower our WACC to 11% from our preious 13%. This changes our motivated value to SEK 15 (11) per share (Base Case), reflecting our long-term positive view for Dignitana. Consequently, our Bear and Bull cases also increase to SEK 6.0 and SEK 22 per share.