Getinge - A Restructuring Play

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Includes: GNGBF
by: Jan Martinek
Summary

Getinge reported the results last week. Worry on FDA penalties has proven significantly exaggerated.

Getinge is now turning from a regulatory play to a restructuring play.

Over the last eighteen years, the company recorded a strong organic and acquisition revenue growth. The company is working on to realize synergies.

"… we haven't, I think, been realistic enough in adjusting our cost structure…"

"I think we can improve our profitability markedly…"

Johan Malmquist, Getinge CEO, closing remarks on the investor call, 28 January 2014

Getinge (OTC: GNGBF) is one of the largest medical devices companies in the world. 2014 was not a good year for the GNGBF. In my last article on GNGBF that was published on 15 January 2015 I presented a summary of the events that created an attractive opportunity:

· On March 7, the company announced that the FDA raised issues with the GNGBF's quality managements systems in certain production facilities. The share price dropped by 35%.

· GNGBF did not re-rate as the market was concerned about the FDA ordering the company to stop the production for a defined period.

· My investment thesis was that the concerns were overblown. The FDA investigation had been ongoing for almost a year. If the FDA wanted to order GNGBF to stop production, they would have already done so a long time ago.

· I argued that the most likely outcome was a monetary penalty.

On 28 January 2015 the GNGBF reported its results. In the report Getinge under-delivered on the past and over-delivered on the future. As far as the past was concerned - the GNGBF revenues increased by 5.5%, while EBITA before restructuring items decreased by 5.6%, both below consensus. As far as the future was concerned the company reported that the order intake rose by 5.6%, well above consensus estimate.

Most importantly the company reported that: "..as a result of the discussions with the FDA are expected to have a negative impact of approximately SEK 500 M on operating profit, the entire amount of which will probably impact earnings for 2015." SEK 500 million represents about USD 61 million, which is an immaterial fine. As a result, the company share price increased by 10%.

On 3 February 2015 GNGBF announced that the settlement with the FDA was reached. The above described impact on the company was confirmed. Contrary to my expectations there will be some production disruptions, but on a very limited product range and a quite limited period, therefore any unavailability of the products should be limited. That is a good outcome in a difficult situation. The share price reacted positively gaining 4%.

I believe the investment rationale for GNGBF is changing now. The FDA situation is resolved. GNGBF is now turning from a regulatory play to a restructuring play.

Since its listing in 1993 the Getinge Group recorded an average annual growth in sales of 18%. The growth has been achieved through a combination of organic growth and acquisitions.

On the call on 28 January, 2014 an analyst asked the CEO Johan Malmquist what is the most disappointing task that has not been accomplished during his 18 years at the helm of the company. John replied: "… I feel is that we have been a little bit too ambitious in trying to push the boundaries of growth in our organisation and as a consequence of that we haven't, I think, been realistic enough in adjusting our cost structure… we need to address the potential we have in terms of complexity reduction …. I think we can improve our profitability markedly …. so (I am) a little bit disappointed that we weren't firmer and quicker on the cost improvement side of our business after 2009."

In other words, 2015 will be a restructuring year for Getinge. The company will focus on obtaining synergies from the acquisitions.

The company has been working on the cost saving plan for some time. The GNGBF was supposed to provide more information on its cost efficiency program that was "deemed to be highly favorable" on the investor day on May 27, 2014. One week before the investor day, the company postponed the event until the FDA situation is clarified. On the latest call John Malmquist confirmed that the investor day will occur after the new CEO Alex Myers will assume his new position as a President and CEO of the Getinge Group in connection with the Annual General Meeting on 25 March, 2015.

Despite the cost saving program announcement, the market is not giving any credit to GNGBF for this. The reason is simple; the market does not know any details. I read most of equity research published by the big banks on GNGBF, and I did not find a single one that would include any benefits of the restructuring in its forecasts.

Getinge is undervalued vs. peers even on consensus numbers that did not include any benefits of the cost saving plans.

Company

Mkt. Cap (EURm)

Price

PE est 15

PE est 16

P/CF est 15

P/CF est 16

Carl Zeiss Meditec

1 844

22,7

18,6

16,8

35,4

18,5

Elekta

3 855

88,7

21,8

18,8

19,6

19,7

Hill-Rom

2 502

48,8

18,6

17,9

22,6

16,8

Hologic

7 242

29,6

19,0

18,1

11,3

11,4

Sirona

4 594

92,3

22,5

19,9

28,7

25,2

Steris

3 485

66,7

22,5

20,2

NA

NA

Tecan

1 058

95,1

24,6

19,9

12,3

16,0

Varian

7891

87,1

18.1

16,8

21,2

18,1

Average

21,1

18,6

23,3

19,0

Getinge

5 290

206

18,4

17,0

11,3

9,9

Premium / discount

-13%

-9%

-52%

-48%

Source: Morgan Stanley, Bloomberg

The PE comparisons with the peers show undervaluation between 9 % - 13%. P/CF comparisons indicate undervaluation by about 50%. The reason is simple. GNGBF still lags behind the performance of the sector. The graph below shows GNGBF vs. the two most common medical devices ETFs

Source: FT.com

Conclusion

The opportunity lies in the fact that the GNGBF consensus forecasts do not give any credit to the planned cost-cutting exercise. No major bank analyst included any cost cutting assumptions, despite the fact that the GNGBF already announced that the company started the cost-cutting plan. The reason for this lies in the fact that without the investor day, it is quite difficult to assume anything. Therefore, the investor day should result in earnings revisions and price target revisions. Both should help the share price.

There are four events forthcoming:

- Announcement of the FDA settlement

- Shareholder meeting on 25 March in which CEO succession will occur

- Announcement of the date of the investor day

- The investor day

All four should bring a positive news to the table. Investors should get ready. Getinge disappointed investors in 2014. This year started with happy news. I believe this trend is likely to continue.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GNGBF over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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