Coltene

Update: 30th Aug 2016 (Stock price of CHF 71.25)

Strong 1H16 results despite various operational and macro headwinds. Reiterate buy call with target price of CHF 82.

Coltene’s stock price has appreciated by 18% since we initiated a position in the company in 21 Jan 2016 (see initiation report published on 21 Jan 2016).

Coltene reported an inline topline for 1H16 where sales grew 3% YoY to CHF 75.6m against the backdrop of various pressure attributed to distributor destocking and Emerging Markets headwinds. Strong revenue growth of 8.8% YoY in Asia mitigated weaker operating environment in Latin America where sales fell 6.8% YoY. Sales in both EMEA and US grew by 1% YoY (3% YoY when adjusted for FX effects).

Lack of one-off FX losses (CHF 1m in 1H15), substantial changes in inventories of finished goods and work in progress and the further optimization of cost structure resulted in net income for 1H16 to increase by 90% to CHF 7.2m.

Coltene reported encouraging response for its BRILLIANT Crios product. Management continues to focus its efforts and product innovation and R&D in order to ramp up its product platform in the field of digital dentistry. The company also opened an office in Japan in order to further ramp up its sales and marketing efforts in the country.

While management’s guidance remain vague, we are confident that the company can achieve our target 2016E net income forecast of CHF 15.6m, resulting in a P/E 16E of 19x which is still a sharp discount to major listed dental peers. Product innovations, cost optimizations and the resumption of growth in emerging markets will provide the tailwinds for Cotene’s 2017E’s net income growth.