Growth momentum picking up

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1 WILLIAM DEMANT - BUY Growth momentum picking up This is a noncomplex product William Demant will report its full-year report on 27 February. We keep our Buy recommendation ahead of the report as we expect William Demant to be back on track gaining market share after a difficult second half of Focus will be on 2014 guidance and the launch of Oticon Nera that is expected to be the main growth driver over the coming quarters. William Demant will report its full-year report on the 27 February. We expect organic growth to pick up in H2 13 William Demant is taking advantage of the launch of Oticon Nera. This should offset the negative trend seen in the groups mid-priced segments that has been negatively affected by competitors having launched new products across the full price range. According to William Demant, sales momentum has started to pick up towards the end of the third quarter and Oticon Nera is expected to contribute considerably to growth in the coming quarters. We estimate organic growth in local currencies in Hearing Aids of 9% in H2 13 slightly higher than the 8% reported in H1 13 over H2 12. Unit growth in the global hearing aid market is estimated at 5-6% in H2 Accounting figures and key figures (DKKm) 2012R 2013E 2014E 2015E Sales Operating profit Results before taxes EBIT margin 19,3% 20,2% 20,7% 21,0% ROE 31,3% 35,7% 44,9% 50,1% ROIC 19,9% 19,7% 20,4% 21,3% EPS 19,7 22,4 24,4 26,2 P/E 27,1 23,9 21,9 20,4 EV/EBIT 19,2 17,4 16,2 15,2 P/BV 7,5 9,6 10,0 10,4 Dividend Fundamental valuation Fair Risk Low News flow Neutral 12-month target price 570 Closing price 535 Shar e infor m ation High/low latest 12 m 544/446 Price trend (3/12 m) 6%/10% Relative to OMXC20-11%/-23% Market value (DKKm) Free float 35% Avg daily vol (DKKm) 39,2 Reuters WDH.CO Bloomberg WDH DC Pr ice tr end 674 William Demant Holding OMXC20 Cap f m a m j j a s o n d j f Source: Jyske Bank & Datastream Jyske Markets, Vestergade 8-16 DK-8600 Silkeborg Senior Equity Analyst, Janne Vincent Kjær jvk@jyskebank.dk This investment research report is an extract of a research report to professional investors. Important investor information: Please see the last page 1

2 13 with a negative ASP erosion of -2%. Hence, we expect William Demant to be back on track outperforming the market by 5 p.p. in H2 13. This should allow William Demant to deliver on the full year guidance with organic growth in the groups wholesale of hearing aids expected to exceed market growth by 3-5 p.p. We expect William Demant to end the year in the low end of the guidance range as Oticon Near was launched late in the year and market conditions in Denmark, Holland and Norway are still challenging with no visible signs of improvement in Q4. Consensus JB Chg % Consensus JB (DKKm) 2H '12R 2H '13E 2H '13E Consensus JB 2013E 2014E 2015E 2013E 2014E 2015E Sales: Hearing Devices ,1% 5,6% Diagnostic Instruments ,0% 1,4% Personal Communication ,9% 9,0% Total ,2% 5,3% EBIT ,5% 18,0% Profit before taxes ,3% 21,3% Net profit ,0% 15,6% EBIT margin 18,4% 19,9% 20,6% 1,6 p.p. 2,2 p.p. 19,7% 20,3% 20,7% 20,0% 20,6% 21,0% Kilde: Jyske Bank & Inquiry We expect William Demant to guide towards organic revenue growth in Hearing Aids of 5-7% driven by the launch of Oticon Nera in the midpriced segment. This is equivalent to the groups wholesale of Hearing Aids outperforming the market by 3 p.p. in a market growing 2-4% in value terms. According to William Demant, Oticon Nera has been well received by hearing aid dispensers and end-users and is expected to contribute considerably to growth over the coming quarters. With the launch of Oticon Nera we believe William Demant will be back on track gaining market share in the mid-price segment. However, competition remains tough. We estimate revenue growth of 4.4% in 2014 with organic growth in Hearing Aids of 6% and a negative effect from FX of -2%. 2

3 Overview William Demant Holding Company profile William Demant develops, produces and sells products within: Hearing aids, which is the core business unit of the group and consist of Oticon and Sonic. Diagnostics Instruments, which produces advanced measuring instruments, and which is the group s second-largest business unit. Personal Communication, which consists of Phonic Ear and Logia (wireless communication systems for the hearing impaired) and Sennheiser Communication that produces headsets. Sales growth and profitability 25% 20% 15% 10% Ownership structure Others 40% Marathon Asset Managemen t 5% Break-down of sales Diagnostic Instruments 9% Oticon Foundation 55% Personal Communicati on 3% 5% 0% Sales growth EBIT-margin Hearing Devices 88% Fundamental valuation Investment case The market for hearing aids is characterised by stable volume William Demant is a most well-run company which, in our growth with an average annual growth over the past 15 years of opinion, has one of the strongest product ranges in the 3.6%. It is expected that the growth will continue over many market, which reflects the company s technologically leading years to come supported by a positive demographic development position. with an annual increase of 2.9% in the number of elderly The market for hearing aids has historically seen relatively citizens above the age of 65. stable volume growth also in periods of economic slowdown. The market for hearing aids is characterised by low However, there has been a trend towards volume growth in penetration. Today, only one out of five people with a hearing recession periods being on the decline. loss applies a hearing aid. However, we still do not Historically, it has been possible to raise prices by 1-2 % a anticipate any noticeable increase in penetration up until year, but we see a risk that price increases will prove 2015, since wearing a hearing aid still carries strong stigma difficult in future as the wireless properties and a among the current 65+ generation. cosmetically correct design has been implemented throughout the product range across all price segments. Price triggers Continued successful launch of Acto and Ino. Successfull launch of the designer hearing aid Intiga. Prospects of a new high-end product at the end of Subsidy schemes will become more widespread. Return to previously high EBIT margin. Increased penetration. Lower average age of first-time users. Risk factors Limited market growth due to economic slowdown. Continued declining average prices due to product mix, public tender and more focus on prices. Continuing consolidation at the retail level. More difficult to differentiate in the high-end segment with respect to design and size. Due to lack of new, break-through high-end products, it will become difficult to raise prices over the coming cycle. 3

4 Date Recommendation Sell Reduce Buy Price at recommendation 515,00 455,00 475,00 527,50 Yield until next change of recommendation or today -11,65% 4,40% 11,05% Index at recommendation 448,20 543,92 542,98 745,62 Yield until next change of recommendation or today 21,36% -0,17% 37,32% Relative performance compared to index -27,20% 4,58% -13,00% The tabled prices are the opening price of the day of the recommendation change. Index: OMXC20 4

5 Disclaimer & Disclosure Jyske Bank is supervised by the Danish Financial Supervisory Authority. The research report is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor any liability for transactions made on the basis of the information or the estimates of the report. The estimates and recommendations of the research report may be changed without notice. The report is for the personal use of Jyske Bank's customers and may not be copied. This report is an investment research report. Conflicts of interest Jyske Bank has prepared procedures to prevent and preclude conflicts of interest thus ensuring that research reports are being prepared in an objective manner. These procedures have been incorporated in the business procedures covering the equity research activities of Jyske Markets, a business unit of Jyske Bank. Moreover, equity analysts at Jyske Bank cannot trade in equities for which they prepare research reports. If an analyst takes over for the responsible analyst in connection with illness, business travels, etc., this analyst cannot trade in the relevant share on the day of publication of the research report and the following day. Jyske Bank may, however, hold positions, have interests in or business relations with the companies that are analysed. The research report has not been presented to the company prior to its release. Analysts receive no payment from persons interested in individual research reports. Read more about Jyske Bank's policy on conflicts of interest at Jyske Bank s share recommendations current allocation Allocation of recommendations, Danish shares (number) 20 Allocation of recommendations, all shares (number) Strong Buy Buy Reduce Sell 0 Strong Buy Buy Reduce Sell Source: Jyske Bank Financial models Jyske Bank employs one or more of the following models: Discounted cash flow (free cash flow), Economic Value Added and the dividend model to determine the fundamental value of a company. The fundamental value is compared to a relative valuation based on multiples such as P/E and EV/EBITA. The recommendation and the price target are moreover adjusted for the expected news flow and the market sentiment based on knowledge of the industry and company-specific circumstances. Jyske Bank s recommendations take into account the expected development in the equity market, the various sectors and company-specific circumstances. Risk Investment in this share is associated with a risk. Movements in the equity market, the sector and/or news flows, etc. regarding the company may affect the price of the share. See the front page of the research report for our view of the risk associated with the share. The risk factors stated and/or calculations of sensitivities in the research report are not to be considered all-encompassing. If the share is traded in a currency other than the investor s base currency, the investor accepts an FX risk. In connection with an ADR or similar papers, the FX risk exists relative to the currency in which the underlying share trades. Update of research report The planned update of the report will be prepared immediately upon the release of the company s financial statements. In addition, research reports may be prepared on special themes specifically for the company or research reports where the company is part of the special theme. These research reports are published on an ad-hoc basis. See the front page for the initial date of publication of the report. All prices stated are the latest closing prices before the release of the report, unless otherwise stated. 5

6 Recommendation Strong buy >20% Buy 10-20% Reduce 0-10% Sell <0% Source: Jyske Bank Share recommendation concepts Risk-adjusted return Our recommendations are relative to the market development and are based on an evaluation of the forecast return within the coming 12 months. The forecast return is the difference between the current price and our 12-month price target (the price target includes the projected dividend). The equity market has historically yielded a return of around 10% (the US equity market, for instance, yielded a return of 10% during the period ). When we determine the recommendation for a share we use the 10% as an estimate of the return in the equity market. Since our recommendations are relative and risk-adjusted, it is possible to compare our recommendations across sectors and risk categories. In addition, the potential is stated in absolute terms via our price target. It should be borne in mind, however, that the recommendation is the anchor. A BUY recommendation will remain a BUY recommendation until changed, even if price increases have taken the price too close to the price target. The future and historical returns estimated in the research report are stated as returns before costs and tax-related circumstances since returns after costs and tax-related circumstances depend on a number of factors relating to individual customer relations, custodian charges, volume of trade as well as market-, currency- and product-specific factors. It is not certain that the share will yield the stated expected future return/s. The stated expected future returns exclusively express our best assessment. Investeringscenter Nord Toldbod Plads Aalborg Tlf: Investeringscenter Midtvest St. Torv Holstebro Tlf: Investeringscenter Sydvest Torvet Esbjerg Tlf: Investeringscenter Østjylland Østergade Århus C Tlf: Investeringscenter København Vesterbrogade København V Tlf: Investeringscenter Sjælland Nørregade Ringsted Tlf: Investeringscenter Fyn Mageløs Odense C Tlf: Investeringscenter Silkeborg Vestergade Silkeborg Tlf: Investeringscenter Trekantsområdet Hjulmagervej 8 F 7100 Vejle Tlf: Jyske Bank (Schweiz) AG Tlf: Berben s Effectenkantoor B.V. Tlf: +31 (0) PBC Hamburg Tlf: Jyske Bank (France) Tlf : Jyske Bank (Gibraltar) Ltd Private Banking Copenhagen (PBC) Tlf: