QuickView: Stratec Biomedical

Stratec (SBS.DE), based in the Black Forest in Germany, occupies a pivotal, but understated position in global diagnostics supplying sophisticated instruments to global companies like Diasorin, Abbott and Siemens. Outsourcing the complex business of integrating clinical assays, mechanics, liquid handling, optics and software into an instrument enables Stratec’s customers to focus on selling proprietary assays. Stratec is rooted in long-term relationships, 63% of revenues are from four customers, generating profitable sales over 10-15 year product life cycles.

A business with three main trunks
Stratec has moved to the international cost-of-sales method. This gives a different perspective on the financial performance. Stratec's main business comes from three interrelated activities. Firstly, new systems are designed to run customer-developed assays. Only released milestones, €9.9m in FY12 down 25% but very volatile, appear separately in the revenue line. Secondly, Stratec manufactures products for customers (2,602 systems in FY12) and has two other small business units (Clinical workflow (software) and nucleic acid extraction). Product sales were €86m, up 17%, 70% of FY12 sales. Thirdly, service parts were 20% of FY12 sales (€25m), down 8% as customers destocked in Q3. Other items added €1.4m.

Finance: A forest of figures
Stratec's new accounts show a 32% gross margin of €39.6m in FY12, down from 35% in FY11. Cost of sales rose 9%, because instrument sales rose while part sales, with high margins and low overheads, dropped. Edison modelling suggests the shipping newer models slightly eroded average margins. Milestones worth €9.9m were recognised on project completions. After three to four years of production, a system’s cost will be significantly lower, due to optimisation of costs and suppliers. Cash fell by €6.5m to €13.7m. Capitalised system development costs on unfinished contracts, a leading indicator of growth, rose 14% to €32.6m.

Valuation: Heading up the mountain
At a historic sales to market capitalisation ratio of 3.2 and P/E of 27.8, Stratec is on a steep growth multiple. Guidance is for a 14-16% CAGR sales route to 2014, with EBIT increasing to over 15% in FY13. This partly depends on client success with the systems launched in 2012, the three launches expected in 2013 and sales of service parts. Tax, due to the Swiss operations, may be about 22%. Stratec will pay a €0.50 dividend (1.5% yield), down from €0.55 to enable increased investment.

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