Stille Q2 2024: Solid across the board

Research Update

2024-07-23

07:45

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.

Filip Einarsson

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Q2 - Sales and profitability in line

Sales came in 1% above RE estimates at SEK142.6m (90% growth y/y, 7.4% organic), with a gross margin of 49%. EBIT came in at SEK25.7m, a beat of 4% compared to our estimates. Sales in the surgical instrument business continue to perform well, growing 13.7% organically y/y, while the operating tables business unit showed a 1% decline y/y (although margins improved y/y).

Improving efficiency set to continue materializng

As we previously highlighted, we expected the integration of Fehling Instruments (acquisition announced at the end of Q4 2023) to generate synergies in both sales and profitability throughout 2024, and we believe this is now materializing. Accordingly, we have positively refined our forecasts and working capital assumptions, in addition to some general model fine-tuning.

Raised base case - SEK261

We upgrade our base case to SEK261 (SEK203). Our bull- and bear cases come in at SEK380 (297) and SEK187 (134), respectively. The share price has continued its momentum, rising approximately 25% since our update in April. Current levels suggest EV/EBITDA multiples of 18.9x to 10.1x and P/E multiples of 27.5x to 18.1x for 2024-2026 on our estimates. With a strong cash position and the company's history of successful acquisitions, further M&A activity could provide an additional catalyst for the share, which trades slightly below our base case.

Key financials

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

Stille reported sales of SEK142.6m, reflecting a 90% y/y growth (organic 7.4%). This only deviates 1% from our SEK141.6m estimate and thus aligned very well with our expectations.

Gross margin was 49% which is higher than our estimated 47% and was positively impacted by a favorable geographic market mix as sales in the North American market were higher than in previous years. The company also highlights its Operational Excellence is yielding results. Thus, approaching gross margins of 50% came quicker than we had anticipated.

On the cost side, OPEX aligned nicely with our expectations and came in at SEK-41.2m (-21.5) compared to our SEK-41.8m estimate. However, the distribution differed compared to our estimate showing lower selling expenses and higher administrative expenses than we had pencilled in.

EBITDA was SEK32.6m (15.7) which is 2% above our SEK31.9m estimate and showed a margin of 23%, if adjusted for one-offs the figure was SEK36m and showing an EBITDA margin of 25%, which is a step up compared to recent years. The improving margins are primarily driven by price, volume, and automation of volume as well as new innovations with lower COGS. The company mentions its satisfaction with the improved margins in "legacy Stille" which coupled with the higher margins in Fehling has improved profitability, while there is no official guidance from the company we believe it is reasonable to assume margins to persist at this higher level.

Stille: Deviation table
	Q2 2023	Q3 2023	Q4 2023	Q1 2024	Q2 2024a	Q2 2024e	dev. %	dev. abs

Net sales	75.1	70.1	77.3	139.7	142.6	141.6	1%	1.0
Sales growth y/y	19%	18%	25%	93%	90%	89%
Sales growth q/q	4%	-7%	10%	81%	2%	1%

Gross profit	33.5	32.7	35.2	67.9	70.3	66.6	6%	3.7

OPEX	-21.5	-20.8	-21.3	-57.6	-44.5	-41.8	7%	-2.8
Selling expenses	-17.4	-16.0	-17.2	-22.0	-38.2	-28.3
Administrative expenses	-4.3	-4.5	-4.3	-19.9	-4.1	-11.3
Other operating expenses/income	0.1	-0.3	0.2	1.0	1.1	-2.1

EBITDA	15.7	15.5	17.7	17.0	32.6	31.9	2%	0.8
EBITDA margin	21%	22%	23%	12%	23%	23%

EBIT	11.9	11.9	14.0	10.3	25.7	24.8	4%	0.9
EBIT margin	16%	17%	18%	7%	18%	18%

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

Strong outlook

Sales in the surgical instrument business unit was SEK109.9m (42.2) and grew 13.7% organically compared to Q2 2023. Sales in the operating tables business unit was softer and came in at SEK32.7m (32.9), portraying a 1% decline y/y while also showing a higher profitability following better cost effectiveness and pricing strategy, this should provide additional support once growth returns in the segment, whereas the company has not managed to improve volume y/y.

Surgical instruments, which sport higher margins, now constitute 77% of sales, and operating tables have shown improvement for the fourth consecutive quarter. Additionally, in a recent interview with Redeye, the CEO encouragingly stated that Stille's best days are not in the past but in the future, which is encouraging given the strong performance recently.

Synergies from Fehling should continue materializing throughout 2024, along with increased automation in production. The company aims to identify and automate processes that currently require manual labor, which will free up capacity and drive down COGS. In the longer term, there should also be additional synergies on the R&D side, although these will take longer to materialize. With this in mind, we have slightly polished our forecasts for 2024e-2026e upwards and continue to see solid growth and expanding margins in the years to come.

Stille: Estimate changes		Updated			Previous		Chg. %	Chg. %	Chg. %
	2024e	2025e	2026e	2024e	2025e	2026e	2024e	2025e	2026e
Net sales	566.0	636.6	713.8	564.2	637.6	710.2	0%	0%	1%
Sales growth y/y	92%	12%	12%	91%	13%	11%

EBITDA	126.3	165.5	189.2	123.3	165.8	188.2	2%	0%	1%
EBITDA margin	22%	26%	27%	22%	26%	27%

EBIT	98.5	133.7	153.5	95.4	133.9	152.7	3%	0%	1%
EBIT margin	17%	21%	22%	17%	21%	22%

EPS	8.9	11.8	13.6	8.6	11.5	13.1	3%	3%	3%

Source: Redeye research (estimates)

Encouraging outlook - we raise our base case to SEK261

We upgrade our base case to SEK261 (203). Our new bull- and bear case amounts to SEK380 (297) and SEK187 (134), respectively. This upgrade comes primarily as a result of adjustments to working capital and upgraded long-term growth rate (terminal year sales up ~10%), but also benefits from the refined near-term forecasts, and general model fine-tuning.

Stille: Base case valuation
Assumptions		DCF	SEKm	Per share
Tax rate	20.6%	2024 - 2026	173	19.2
WACC	9%	2026 - 2033	882	98.2
Shares outstanding	9.0	Terminal	1,321	147.1
Sales CAGR 2023 - 2026	34%	Estimated net cash	84	9.3
Sales CAGR 2026 - 2033	9%

Terminal value assumptions 2034		Base case		261
Group sales	1,302	Upside potential		7%
Terminal growth	2%
EBITDA margin	25%
Source: Redeye research

At SEK245 per share Stille trades at EV/EBITDA of 18.9x-10.1x and P/E of 24.2x-18.1x for 2024e-2026e, which represents a discount compared to its five-year historical multiples visualized below. However, these years does includes 2020 and 2021 where Stille was trading at historically high multiples, which somewhat skews the comparison.

Investment thesis

Case

Resilient growth to be bolstered by M&A

Redeye sees a resilient investment case, benefiting from a state-of-the-art brand and a market-leading niche position within the surgical instrument segment. We believe the market is underestimating the growth prospects and enduring revenue streams of Stille's business units, coupled with ongoing efficiency measures. Additionally, the company’s track record of successful acquisitions and proactive M&A strategy offers further 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. The company has achieved a compounded sales growth of 17% (including acquisitions) from 2019 to 2023 and has reported EBITDA margins ranging from 13% to 21% over the same period. 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 and improve profitability.

Challenge

Potential mismatched decision-making by customers

In some 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 SEK187-380 with a base case of SEK261. 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 approximately 25% in the coming years.

Financials

Rating definitions

The team

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