[Merknad, Elekta AB har avvikende regnskapsår, red.anm.]
We're maintaining our valuation and our wide moat rating for Elekta, following its first-quarter results. The company actually delivered slightly better results on the revenue and orders side than expected, but given that the first quarter is typically the smallest, and given that much of the US bounceback is due to delivery of delayed software contracts, Elekta maintained its full-year outlook. This year remains one of stabilisation for Elekta; from that perspective, a lack of bad news is good news for this battered company. Shares remain significantly undervalued.
Overall, Elekta delivered 4% constant currency sales growth and a 5% constant currency decline in orders in the quarter. By region, orders in the Americas were up 13% on a constant currency basis, orders in EMEA were down 30% and orders in Asia-Pacific were up 12%. Sales were up substantially in the Americas (13%), but much of that is due to delivery of delayed software contracts. Adjusted for this anticipated pickup, the US market didn't demonstrate substantial improvement, and the company is still in the midst of its reorganising efforts to get its growth on track in this key market. EMEA orders were down, largely due to tough comps, while Asia-Pacific performance was good in China, Australia and India, but was flat in Japan and down in Southeast Asia.
On the innovation front, Elekta's discussion was centred on Gamma Knife Icon and Atlantic. The new GK platform aims to reinvigorate the franchise, which has seen deceleration and even revenue declines in the past few years, and the company is seeing some momentum, with $200 million of upgrade opportunities globally. Icon has received FDA clearance, and is now marketable in key markets. The Atlantic project remains on target, and we anticipate the installation of a second consortium partner in the short term. MRI-Linac remains a lucrative, albeit uncertain, long-term opportunity for Elekta.
On the margin side, we saw a substantial, albeit anticipated, 600-basis-point improvement, up to 40%. At the latest Capital Markets Day, the company outlined its key strategies for boosting its EBITA margins and improving its cash conversion, and it is making progress on that front. Obviously, the best fix for margins would be a return to growth, but restructuring initiatives should provide SEK 450 million in savings, and some of them will hit the income statement in the next fiscal year.
Elekta's stock continues to trade at a significant discount to our fair value estimate, and the near-term environment remains choppy. We acknowledge that even with signs of stability in the first quarter, this year and perhaps next will be challenging for the company with the rollout of its new strategies in the US, and many of the emerging markets could remain sluggish. Furthermore, given the uncertain macroeconomic environment in China, there is potential for demand deceleration in this critical market for Elekta, although we believe the substantial unmet need in cancer treatments will continue to propel demand. A lack of near-term catalysts and weak earnings growth in 2016 are the main reasons the stock is widely disregarded. That said, we still believe that there are long-term opportunities for radiotherapy in general, and we are confident in Elekta's competitive positioning. We don't anticipate a return to double-digit sales growth in our forecast, but we believe that attractive secular trends and the company's strong portfolio of products should result in broad improvements. Overall, Elekta offers a compelling long-term reward profile, even with substantial near-term risks.
Opprinnelig publisert 1. september 2015, på Morningstar Select.
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