Embla Medical: Tailwinds and low guidance bode well for H2 - ABG

- 6% organic growth despite headwinds in major markets
- Strong margins highlight low guidance into H2
- EPS +3-6%, FVR hiked to DKK 27-40 (25-38)

Q2 in numbers
Embla's organic growth was 6% in Q2, with the Americas as the weak spot (again) with 1% growth, while EMEA and APAC surprised positively. The main standout in quarter was the 150-210bp gross margin beat, which enjoyed tailwinds from scale, employee cost savings and the product mix. Opex grew 3% organically, i.e., well below the organic sales growth, but helped by lower variable compensation on weak US growth. Embla grew EPS 23% y-o-y and converted a healthy 38% of EBITDA to free cash flow, which brings Embla to 3.1x net debt/EBITDA, likely putting Embla back inside its targeted 2.0-3.0x leverage already in Q3.

Guidance with upside into H2'24
Embla narrowed its organic growth guidance to 6-8% (was 5-8%) after solid top-line generation in Q2. The good Q2 comes despite sluggish US growth and a continued adverse Australian reimbursement impact, i.e., a more normal growth would likely be 1-2pp higher. Embla enters H2 with easier comps, new products and likely tailwinds from new product launches and US Medicare coverage expansion. Also, the ~20% FY EBITDA margin guidance is looking cautious after ~22% in Q2.

Fair value range up to DKK 27-40
The stronger gross margin trajectory in Q2 combined with proven opex containment makes us upgrade our EBITDA margin estimates by 70-110bp, lifting EBITDA by ~5% , softened somewhat by higher net financial costs. EPS is up 3-6%, which on our 20-30x P/E valuation approach sees us lift our fair value range to DKK 27-40 (25-38). We see Embla Medical increasingly moving out of the recent years' weak earnings growth and building visibility around a stronger organic growth outlook, and its ability to contain costs and leverage its underutilised low-cost production set-up while also adding value accretive M&A such as FIOR & GENTZ.

Länk till analysen i sin helhet: https://cr.abgsc.com/foretag/embla_medical/Equity-research/2024/7/embla-medical---tailwinds-and-low-guidance-bode-well-for-h2/