Morningstar | Weak Margin and Cash Flow in Spotlight for Elekta in 1Q; Maintaining Valuation
We're maintaining our Elekta fair value estimate of SEK 115 per share following the release of first-quarter results. With shares down nearly 10% on Aug. 30, Elekta's stock now trades around our fair value estimate. We maintain our wide moat for the firm.There were three key factors we were looking for in the quarter: order growth in legacy products across regions, demand uptake for Unity, and Elekta's progress towards its EBITA target. On the first two, Elekta performed in line with our expectations. However, the firm unexpectedly delivered a cratered gross margin, EBIT, and cash flow numbers. While it is tough to stomach a 700-basis-point gross margin decline over the first quarter of last year, the underlying factors explaining this collapse were reasonable; while the margin drop, a spike in inventory days, and smaller advances all brought memories of a few years ago, we reserve our judgement until the next quarter, when many timing issues should peter out. That said, a 33% contribution margin in North America this quarter (from 41% last year), fully attributable to project mix and timing, concerns us.
On the Unity front, the company got a CE Mark in Europe earlier this summer, applied for FDA clearance in the U.S., and got orders for four systems in the quarter. We didn't anticipate an uptick in European orders to materialise post-CE Mark, so only two systems sold in Europe didn't phase us. Ultimately, success of Unity (especially considering its steep price tag) will hinge largely on the treatment data, and we suspect that while practitioner curiosity regarding Unity's capabilities will be high, demand will largely come from the centres of excellence and high-volume clinics. With 30 orders for Unity so far, Elekta should be able to deliver on its target of 75 systems.
The company's overall order growth was good across all regions, and North American performance was impressive. Adjusted for Unity orders, legacy products delivered in-line results.
Elekta AB is a human care company providing clinical solutions for treating cancer and brain disorders. Co. develops tools and treatment planning systems for radiation therapy including brachytherapy and radiosurgery, as well as workflow improving software systems across the field of cancer care. Co. has four product areas: Elekta Neuroscience, which develops solutions for the diagnosis and treatment of neurological diseases; Elekta Oncology, which develops clinical solutions for radiation therapy, imaging systems and clinical solutions for patient positioning and immobilization; Elekta Brachytherapy, which is engaged in cancer treatment based on internal radiation; and Elekta Software.
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