Power of BIG believing
▊ BIG’s weaker results could prompt the market to further downgrade the stock. However, we see bright spots in Spectrum Dynamics’ instant success, a more disciplined approach to future spending and the positives that regulatory approvals and new launches could bring. At 32% of our FY14 forecast, 1HFY3/14 core EPS missed our below-consensus estimates due to lower licensing income and higher opex. We slash FY14-16 EPS by 19-35% for lower sales assumptions and cut our SOP-based target price by 10%. Our contrarian Outperform rating hinges on the instant success of Spectrum Dynamics, product launches, regulatory approvals and M&A accretion.
Not big in Japan anymore
2QFY14 results came in at just 15% of our full-year forecast because of 1) a 25% decline in licensing revenue due to continued challenges in Japan, and 2) higher operating expenditure from SG&A that arises from the costly brand-building exercise, though better cost measures have been put in place.
Pleasing volume recovery
As with volume growth in the EMEA and APAC regions, DES sales in China improved significantly (by double digits according to management). We believe that ASP weakness persists, leading management to downgrade its FY14 revenue growth guidance from 15% to “moderate”. Our main grouse is that there is not much room for improvement in licensing and royalty income in the next few quarters.
Contrarian positive view
We think BIG’s cheaper valuation only prices in the near-term challenges and understates the earnings uplift from the commercialisation of new products in FY15. Additionally, Spectrum Dynamics will boost earnings when it gets approval from China’s Food and Drug Administration. BIG is working on multiple product launches to generate new revenues for the company. Other products are gaining ground with various regulatory approvals and the soft launch of BioFreedom remains a source of excitement.