2H15 results missed; guidance maintained for 2016
MDG reported sales/core profit of HKD734m/68m in 2H15, representing15%/4% YoY growth. The healthy topline growth was largely driven by doubledigit ex-FX ASP growth in 2015. However, the slower-than-expected profitgrowth was due to higher administrative costs after consolidation of theacquired business in Australia, higher bonus paid in Europe, and a higher taxrate in 2015. We expect tax savings in 2016 due to transfer pricing.Management reiterated guidance of 10% organic growth and 20% additionalgrowth from M&A in 2016.
Growth decelerated in 2H15 due to FX; decent ASP growth
Europe/China/US achieved sales growth of 2.9%/8.5%/19.4% in 2H15 vs.9.3%/23.1%/41.7% in 1H15. The growth deceleration in Europe and China wasdriven by EUR and RMB depreciation, while we estimate organic growth to behigh single digit in Europe and approximately 20% in China for 2015. For theUS, growth in 2H15 was organic while the faster growth in 1H15 was drivenby acquisition. Management believes 20% organic growth for the US in 2016 isachievable and breakeven is on track. We highlight ex-FX ASP growth in 2015was 10-15% while volume growth was 15%. The strong ASP growth wasdriven by annual price increase and mix change to high-end products. Weexpect ASP growth to continue but the magnitude may be smaller.
On margins, tax rate, and M&A
GM fell to 53.6% in 2H15 vs. 54.1% in 2H14, mainly due to FX movements.Core EBIT margin fell to 15.0% in 2H15 vs. 15.7% in 2H14, driven by higheradministrative costs due to consolidation of The SCDL Group in Australia andhigher bonuses paid in Europe. We expect moderate margin erosion with M&Aongoing. On tax rate, the company expects improvement starting from 2016vs. 38% in 2015, as they are engaging in transfer pricing. On M&A,management indicated that they have found good targets. We remindinvestors that the past valuation ranged from 4-7x EV/EBITDA; however, themultiple might be higher if the targets would generate better synergies.
Reducing target price to HKD4.2 from HKD4.6; risks
Our TP is based on 21x 2016E EPS of HKD0.20. This compares with MDG’sglobal dental consumables peers of 30x 2016E EPS, with 21% growth in 2017E(vs. 25.5% for MDG). We apply a 30% discount to its global peers due to lowerentry barriers and technology requirements for the dental prosthetic industry.Downside risks include slow acquisitions and low ASP growth.