Stille Q1 2024: Another stable quarter

Research Update

2024-04-26

07:40

Analyst Q&A

Closed

Filip Einarsson answered 2 questions.

Redeye upgrades its base case and forecasts following a solid Q1 report from Stille. The acqusition of Fehling is now fully incorporated and synergies is likely to start materializing throughout 2024 and beyond, providing good prospects for continued organic growth.

Filip Einarsson

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Solid report

Q1 sales came in 20% above our estimates, and if adjusted for M&A-related one-off costs, EBIT/EBITDA margins aligned nicely with our projected 24% and 19%, respectively. Sales figures were solid in both business units, and the company also benefited from a favorable sales mix in the quarter.

Fehling Instruments incorporated - synergies to materialize throughout 2024

Since January 1, 2024, the acquisition of Fehling Instruments has been fully incorporated, and as we expect synergies to materialize throughout 2024, we have made some upward revisions to our forecasts.

New base case - SEK203

We upgrade our base case to SEK203 (SEK193). Our bull- and bear cases come in at SEK297 (283) and SEK134 (119), respectively. The share price has risen 18% since our last research update in February and currently trades slightly below our updated base case. Current levels suggest EV/EBITDA multiples of 14x-9x and PE multiples of 22x-14x for 2024e-2026e.

SEKm	2022	2023	2024e	2025e	2026e
Net Sales	246.4	294.9	564.2	637.6	710.2
Sales Growth	31.7%	19.7%	91.3%	13.0%	11.4%
EBITDA	42.0	59.3	123.3	165.8	188.2
EBIT	32.4	44.9	95.4	133.9	152.7
EBIT Margin	13.2%	15.2%	16.9%	21.0%	21.5%
EV/EBITDA	13.6	9.3	13.6	10.5	8.8
P/E	23.9	29.1	22.1	16.6	14.5

Q1 2024

Sales came in at SEK139.6m, which was 20% above our estimates and reflects a y/y growth of 93% (organic 10%). The sales in the quarter were positively influenced by the acquisition effects of SEK60m and currency effects of SEK1.9m. The acquisition of Fehling (announced in Q4) was incorporated on 1 January; in our figures, we only calculated it to be incorporated in February, largely explaining the deviation. The company states that sales in both business units were strong across all markets and highlights that the operating tables business grew 13.7% y/y as imagiQ-sales in Europe were particularly strong.

The gross profit of SEK 67.8m was 25% above our estimate, and the gross margin of 49% represents a step up compared to previous quarters on account of a favorable geographic sales mix, where US sales were higher than the previous year and the acquisition of Fehling. Given expected synergies materializing throughout 2024, we expect gross margins to stabilize around 50% rather than the previous levels of around 45% over the coming year.

OPEX exceeded our projections. However, this was primarily attributed to one-time expenses associated with the acquisition and also higher administrative costs than we had calculated. This led to EBITDA coming in at SEK17m compared to our estimate of SEK27.5m (margin 12% vs 24%). In hindsight, our M&A-related cost projections were too low, which is the primary reason for the deviation. If adjusted for the one-offs related to the acquisition, the EBITDA margin was 24%, and the EBIT margin was 19%, aligning with our estimates.

Stille: Deviation table
	Q1 2023	Q2 2023	Q3 2023	Q4 2023	Q1 2024a	Q1 2024e	dev. %	dev. abs
Net sales	72.4	75.1	70.1	77.3	139.7	115.9	21%	23.8
Surgical instruments	40.7	42.2	38.2	41.6	103.6	79.1
Operating tables	31.7	32.9	31.9	35.6	36.0	36.8

Gross profit	30.7	33.5	32.7	35.2	67.9	54.5	25%	13.4
Gross margin	42%	45%	47%	46%	49%	47%

OPEX	-23.6	-21.5	-20.8	-21.3	-57.6	-32.7	76%	-24.9
Selling expenses	-16.4	-17.4	-16.0	-17.2	-22.0	-24.3
Administrative expenses	-3.8	-4.3	-4.5	-4.3	-19.9	-8.7
Other operating expense/income	-3.4	0.1	-0.3	0.2	-15.7	0.3

EBITDA	10.4	15.7	15.5	17.7	17.0	27.5	-38%	-10.5
EBITDA margin	14%	21%	22%	23%	12%	24%

EBIT	7.1	11.9	11.9	14.0	10.3	21.7	-53%	-11.4
EBIT margin	10%	16%	17%	18%	7%	19%
Source: Redeye research (estimates), Stille (historical data)

Following the acquisition, surgical instruments now represent the absolute majority of Stille's sales (~75%). This will have positive implications margin-wise as the business unit sports higher profitability margins compared to its operating tables counterpart. This is likely to start showing off in the income statement throughout 2024.

Fehling Instruments incorporated - synergies to materialize throughout 2024

Fehling's integration has been ongoing for a few months, and the company is satisfied with the process. We believe that synergies from the acquisition, not least related to R&D and sales, will start materializing throughout 2024. In turn, as we have previously discussed with Stille in this interview, for example, the report again mentions the company’s intention to update its financial targets. We find it reasonable to anticipate an upward revision to profitability targets and potentially also polishing the sales target. We also believe expecting an increasing focus on M&A moving forward is realistic given the current prospects.

In addition to adjusting for the Q1 numbers and some minor model fine-tuning, we chose to revise our 2024e-2026e sales forecasts upwards by 8-5% following the report.

Stille: Estimate changes		Updated			Previous		Chg. %	Chg. %	Chg. %
	2024e	2025e	2026e	2024e	2025e	2026e	2024e	2025e	2026e
Net sales	564.2	637.6	710.2	520.1	601.4	678.4	8%	6%	5%
Sales growth y/y	91%	13%	11%	76%	16%	13%

EBITDA	123.3	165.8	188.2	124.5	153.3	172.1	-1%	8%	9%
EBITDA margin	22%	26%	27%	24%	25%	25%

EBIT	95.4	133.9	152.7	104.2	129.2	145.2	-9%	4%	5%
EBIT margin	17%	21%	22%	20%	21%	21%

EPS	8.6	11.5	13.1	8.5	10.5	12.2	1%	10%	8%

Source: Redeye research (estimates)

Stille: Financial overview - quarterly
	Q1 2024	Q2 2024e	Q3 2024e	Q4 2024e	2024e	2025e
Net sales	139.7	141.6	134.3	148.6	564.2	637.6
Gross profit	67.9	66.6	64.5	71.3	270.3	315.6
EBITDA	17.0	31.9	33.6	40.9	123.3	165.8
EBIT	10.3	24.8	26.9	33.4	95.4	133.9
EPS	1.4	2.1	2.3	2.9	8.6	11.5

Sales growth y/y	93%	89%	92%	92%	91%	13%
Gross margin	49%	47%	48%	48%	48%	50%
EBITDA margin	12%	23%	25%	28%	22%	26%
EBIT margin	7%	18%	20%	23%	17%	21%

Source: Redeye research (estimates), Stille (historical data)

New base case - SEK203

The adjustments to our model and time factor upgrade our base case to SEK203 (SEK193). Our bull- and bear cases come in at SEK297 (283) and SEK134 (119), respectively. The share price has risen 18% since our last research update in February and currently trades slightly below our updated base case. Current levels suggest EV/EBITDA multiples of 14x-9x and PE multiples of 22x-14x for 2024e-2026e.

Stille: Base case valuation
Assumptions		DCF	SEKm	Per share
Tax rate	20.6%	2024 - 2028	238	26.5
WACC	9.0%	2029 - 2031	263	29.3
Shares outstanding	9.0	2032 - 2033	170	18.9
Sales CAGR 2024 - 2028	11.8%	Terminal value	1,115	124.1
Sales CAGR 2029 - 2031	6.6%	Estimated net debt	-40	-4.4

Terminal value assumptions 2034		Base case		203
Terminal growth	2%
EBITDA margin	25%
Source: Redeye research (estimates)

Case

Durable growth to be bolstered by M&A agenda

Redeye sees a defensive investment case benefiting from a state-of-the-art brand and a market-leading niche position. We believe that the market is underestimating the growth prospects and enduring revenue streams of Stille's business units. Additionally, the company's track record of successful acquisitions and proactive M&A strategy enhances the optionality.

Evidence

Unique brand, premium products and first-class partners

Having been active in its niche for almost two centuries, Stille has gained an excellent reputation with surgeons: its products are synonymous with quality for its end customers, adding to its unique and well-known brand. In addition to its direct sales operation in Sweden and its global distribution network, the company has well-established partnerships with market leaders such as GE Healthcare, Siemens Healthineers, Ziehm Imaging, and Philips. This provides worldwide reach for its products and gives access to their sales organization via its distributors. We judge that investors have not yet fully grasped the synergy its distribution channels could bring with further acquisitions and increased efficiency measures.

Supportive Analysis

Stille’s has established itself in the premium segment with its two business units’ surgical instruments and operating tables. Its revenues have proved resilient even during the recession following the financial crisis, indicating how sticky its niches are. Both of its business units benefit commercially from the major global trends of increased living standards, longer life expectancy, and the growing worldwide population. The global market for surgical instruments and operating tables are anticipated to experience mid-to-high single digit growth annually for in the coming years. Due to the high value proposition of its products, we anticipate that Stille can organically outpace this growth, leveraging its strong brand, high-value products, and robust distribution network. In addition to a strong product portfolio Stille has in recent recent years completed two acquisitions: one in 2021 (S&T) and another announced at the end of 2023 (Fehling Instruments). These transactions have highlighted the company's ability to acquire high-quality, unlisted family-owned businesses in the surgical instruments market at attractive price tags. We believe that Stille has a strong position in its targeted niche that coupled with strong cash flow, good access to capital, and an increased M&A-focus opens up a potential to consolidate its targeted niche markets. Additionally, the company aims to further streamline and automate certain resource intensive steps of its production process to increase efficiency while maintain the high-quality of its products. The company has the following financial targets: - Organic growth of at least 10% per year - Gross profit margin should exceed 50% over time - EBITDA margin should be at least 20% across a business cycle - Net Debt/EBITDA should not exceed 3 over time - Complementary acquisitions

Challenge

Production bottleneck

Stille's state-of-the-art surgical instruments and operating tables are produced through a predominantly manual production process. This method can be seen as a potential bottleneck in production, and it somewhat limits scalability. Striking the right balance between enhancing production efficiency and preserving their superior functionality and user-friendliness is a delicate challenge. Nevertheless, Stille is actively investing in automating resource-intensive aspects of the production process to address this concern.

Challenge

Potential mismatched decision-making by customers

In many cases, the decision-making customer is not the surgeon. Hence, it might be more challenging for budget purposes to motivate Stille's premium instruments' sales despite being requested by the end-user, and the surgeon's involvement could be insignificant. This could favor a more short-term view of the costs per unit, which could negatively influence the market uptake of Stille's more expensive products. However, partly offsetting this risk is that in the company’s largest market, the US, a comparably higher number of customers are private. Hence, this risk is mainly applicable in the EU, where most sales go through public procurement.

Valuation

M&A and sales growth to close valuation gap

We value Stille through a 2024e to 2033e DCF model using a WACC of 9% and a terminal growth of 2%, and our fair value range amounts to SEK119-283 with a base case of SEK193. Our base case derives from Stille presenting growth and margins in line with its financial targets. Our bull case assumes slightly higher growth and margins, whereas our bear case assumes lower levels of growth and profitability compared to our base case. The key drivers to closing the valuation gap are continued sales growth, cost efficiency measures to support the ongoing margin expansion, and the potential for additional expansion through strategic acquisitions.

Quality Rating

People: 4

We believe that Stille's management possesses the experience and know-how necessary to drive growth. The CEO's proactive "Doer-attitude" and experience in driving global sales within the healthcare sector, coupled with a seasoned board of directors, where the largest owner, Impilo (holding 23% of equity), inherently represent the shareholder value perspective in the business strategy.

Moreover, the company's ownership boasts a wide range of investors, including specialist investors such as Linc (also holding 23% of equity) and institutional investors, which should provide ample access to capital to sustain a continued M&A agenda.

Business: 4

Stille holds a prominent position as a market leader in its specialized field, offering top-tier surgical instruments and operating tables. With over 180 years of experience in the former, the company has cultivated a robust brand renowned for its state-of-the-art equipment, which still relies significantly on manual labor to uphold its superior functionality. This dedication to quality, coupled with a strong brand presence, allows Stille to command premium prices, thereby ensuring solid margins. While the underlying market experiences moderate growth, Stille has positioned itself to gain market share positioning itself for premium sustained organic growth. Additionally, the company is investing in automation to expedite certain resource-intensive but not crucial steps of the production process, which is likely to fuel a margin expansion over the coming years.

The company also has a track record of successful acquisitions and maintains a proactive M&A agenda, enabling it to leverage economies of scale, cross-selling opportunities, and R&D efforts.

Financials: 3

Stille has a history of moderate and occasionally inconsistent growth. However, the company's income streams have demonstrated resilience during challenging periods. In recent years, management has implemented several initiatives aimed at accelerating both sales and EPS growth. The company has set the following financial targets:

Organic growth of at least 10% per year
EBITDA margin should be at least 20% over across a business cycle
Gross profit margin should exceed 50% over time
Net Debt/EBITDA should not exceed 3 over time
Complementary acquisitions

While the company has largely met most of these targets in previous years, gross margins have occasionally fallen slightly short of the goal. However, ongoing efficiency measures are now beginning to yield results, and we anticipate the company achieving stable EBITDA margins of approximately25% in the coming years.

Financials

Income statement
SEKm	2023	2024e	2025e
Revenues	294.9	564.2	637.6
Cost of Revenue	-162.7	-294.0	-322.0
Operating Expenses	-87.2	-174.9	-181.7
EBITDA	59.3	123.3	165.8
Depreciation	-5.8	-12.0	-14.3
Amortizations	-8.5	-16.0	-17.5
EBIT	44.9	95.4	133.9
Shares in Associates	0.00	0.00	0.00
Interest Expenses	-15.9	-12.4	-8.0
Net Financial Items	-14.0	1.8	-4.0
EBT	30.9	97.2	129.9
Income Tax Expenses	-4.9	-19.6	-26.8
Net Income	26.0	77.5	103.1
Balance sheet
Assets
Non-current assets
SEKm	2023	2024e	2025e
Property, Plant and Equipment (Net)	59.5	72.5	70.9
Goodwill	23.3	0.00	0.00
Intangible Assets	132.4	558.0	559.6
Right-of-Use Assets	0.00	0.00	0.00
Other Non-Current Assets	0.38	33.1	33.1
Total Non-Current Assets	215.6	663.7	663.7
Current assets
SEKm	2023	2024e	2025e
Inventories	66.6	133.7	151.0
Accounts Receivable	31.3	66.9	75.5
Other Current Assets	250.1	14.9	16.8
Cash Equivalents	241.4	240.6	322.7
Total Current Assets	589.3	456.0	566.1
Total Assets	804.9	1,119.7	1,229.7
Equity and Liabilities
Equity
SEKm	2023	2024e	2025e
Non Controlling Interest	0.00	0.00	0.00
Shareholder's Equity	632.3	710.7	813.8
Non-current liabilities
SEKm	2023	2024e	2025e
Long Term Debt	15.0	175.2	175.2
Long Term Lease Liabilities	23.1	0.00	0.00
Other Long Term Liabilities	54.6	0.00	0.00
Total Non-Current Liabilities	92.7	175.2	175.2
Current liabilities
SEKm	2023	2024e	2025e
Short Term Debt	20.8	180.3	180.3
Short Term Lease Liabilities	4.1	0.00	0.00
Accounts Payable	20.8	37.1	42.0
Other Current Liabilities	34.3	16.3	18.5
Total Current Liabilities	80.0	233.8	240.7
Total Liabilities and Equity	804.9	1,119.7	1,229.7
Cash flow
SEKm	2023	2024e	2025e
Operating Cash Flow	37.3	180.9	114.0
Investing Cash Flow	-12.9	-25.0	-31.9
Financing Cash Flow	179.0	208.9	-30.9

Rating definitions

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