Redeye returns with an updated take following a solid Q2 report from Stille, showing very minor deviations compared to our estimates. The integration of Fehling is proceeding well and synergies starts showing. We see good prospects for continued growth and for the current stronger margins to persist. Accordingly, we raise our base case.

<strong>Q2 - Sales and profitability in line</strong>

ADDvise Group

Stille

* Unable to scale up without expensive reinvestment, with NWC/Sales consistently exceeding 20%.
* Unlikely to achieve five-fold organic growth in a decade, requiring inorganic expansion for substantial growth.
* Operates in a market with numerous competitors, although competition is reduced in its premium niche.
* Returns on invested capital (ROIC) have not consistently exceeded the cost of capital (WACC) in recent years.
* Production is primarily manual labour which could become a bottle neck for the company.

* Strong brand and premium positioning in surgical instruments and operating tables, with global presence and faster growth than the underlying market.
* Benefits from secular tailwinds in the surgical instruments market, supported by an aging population in Western countries.
* Diversified revenue base with hundreds of products sold globally, reducing dependence on single markets or customers.
* Proactively promotes environmental sustainability and contributes to the greater good through durable, high-quality surgical instruments.
* Demonstrates pricing power and operational stability, with minimal regulatory interference and commodity price impact on earnings.

* Has a history of moderate and occasionally inconsistent growth, initiatives imlemented recent years have had an effect to reverse this. 

* Profitability has improved over the past few years, though most of this expansion is likely already realized.

* Free Cash Flow (FCF) conversion below 80% over the past five years, indicating potential challenges in converting profits to cash.

* Proven business model and a very long history of profitability with durable income streams also during challenging macroeconomic periods. 

* Expanding profitability with gross margins of roughly 50% range and EBITDA margins of approximately 25%, indicating profitable product mix and pricing power.

* Solid balance sheet with a net debt / EBITDA levels of less than 1 providing opportunity for in-organic growth initiatives.

* Ongoing efficency measures to ensure elevated profitability levels.

* Financial targets are 10% organic growth per year, EBITDA margin >25%, and Net Debt/EBITDA LTM <3

* One of the primary downsides in the people segment relate to the (aside from Impilo who holds c23% of the shares and a seat on the board of directors) limited insider ownership. The CEO and CFO combined holds only ~0.1% of the company. 

* Stille's CEO joined the company in the first half of 2023, and changes to the board of directors were announced later in the year. Despite these transitions, the company has continued to progress smoothly, although the board and management have not yet had sufficient time to fully prove themselves.

* Overall, we believe Stille's board and management make the company well-rounded, combining in-depth sector knowledge with expertise in finance, sales, and strategy. Execution on strategic initiatives in the recent years have been solid and created shareholder value.

* The CEO, who joined the company in 2023, brings a proactive, "doer" attitude and over 17 years of experience in the medical technology industry.

* Stille's board and management have delivered shareholder value in recent years through strategic M&A, financed in a manner that is favorable to shareholders.

* Institutional owners hold over 70% of Stille's equity. The primary shareholders, Linc and Impilo industry-savvi specialist investors, control 46% of the equity.

SEKm	2022	2023	2024e	2025e	2026e
Revenues	246.4	294.9	566.0	636.6	713.8
Revenue Growth	31.7%	19.7%	91.9%	12.5%	12.1%
EBITDA	42.0	59.3	126.3	165.5	189.2
EBITDA Margin	17.0%	20.1%	22.3%	26.0%	26.5%
EBIT	32.4	44.9	98.5	133.7	153.5
Net Income	23.5	26.0	80.2	106.2	121.9
EV/Sales	2.3	1.9	4.2	3.3	2.7
EV/EBITDA	13.6	9.3	18.9	12.6	10.1

Q2 - Sales and profitability in line

Improving efficiency set to continue materializng

Raised base case - SEK261

Key financials

Q2 - Sales and profitability in line