Re-initiate coverage with BUY for a target price of KRW180,800
We re-initiate our coverage of Osstem Implant with BUY for a target price of KRW180,800, based on 2022F EPS and a target PER of 15.1x. In dental implants, global market growth is currently led by the value segment. Unlike the premium segment, business expansion in the value segment requires increasing the number of dentists capable of performing implant surgeries.
Osstem Implant already has an education system and global sales network in place in the value segment. The company continues to see steady growth in the number of dentists completing its AIC (Advanced Dental Implant Research and Education Center) training courses, and typically seals sales contracts with around 80% of the trainees in the program. We believe Osstem Implant is: 1) spearheading growth of the low/mid-range segment with its training system; 2) advancing into the premium segment with the launch of Hiossen; and 3) looking to diversify its product portfolio even further through an M&A deal. As a result, the company is expected to gradually narrow the valuation gap with global leaders going forward.
2Q review: Strong results squash excessive concerns over earnings
Osstem Implant generated operating profit of KRW56.2bn (+64.2% YoY) on sales of KRW265.4bn (+31.7% YoY) in 2Q22. Despite shutdowns caused by geopolitical issues and the resurgence of COVID-19, brisk sales in China (KRW72.6bn, +28.2% YoY) and Russia (KRW24.3bn, +66.4% YoY) drove company-wide top-line growth. Subsidiaries in North America and Europe also delivered solid earnings thanks to favorable forex conditions. We expect even growth across all regions to continue from 2Q22 into 3Q22. Operating margin jumped by 4.2%p YoY to 21.2% in 2Q22 despite the resumption of conferences and other marketing activities, with profitability remaining solid on operating leverage effect driven by top-line growth.
2022 outlook: Sales of KRW1.07tr, OP of KRW222.3bn
For full-year 2022, sales are forecast at KRW1.07tr (+30.3% YoY) and operating profit at KRW222.3bn (+55.1% YoY). Key drivers of top-line growth in 2022 include: 1) the growing number of client clinics/hospitals in China alongside the increase in AIC training completions; 2) larger sales contribution from the Hiossen brand of premium dental implants; and 3) retail channel expansion in Russia and Europe. Operating margin should rise 3.3%p YoY to 20.7% on operating leverage effect and favorable forex rates.