[Click eStock] "SD Biosensor, Q4 Contraction Inevitable but Undervalued"

Shinhan Investment Corp. Report

[Asia Economy Reporter Minji Lee] Shinhan Investment Corp. maintained a buy rating and a target price of 40,000 KRW for SD Biosensor on the 4th.

In the third quarter, SD Biosensor recorded sales of 551.2 billion KRW and operating profit of 293.4 billion KRW, marking increases of 4.6% and 17.6% respectively compared to the same period last year. Sales and operating profit exceeded market expectations by 60% and 132%, respectively.

The strong exports of rapid antigen test kits to Asia, including Japan and Taiwan, along with the reversal of sales (100 billion KRW) previously accounted for as liabilities in the first quarter due to variable consideration, were reflected. The accounting treatment of variable consideration occurred due to the large-scale supply of rapid antigen test kits to Roche amid the spread of the Omicron variant in the U.S. in the first quarter. The operating profit margin increased by 9.4 percentage points compared to the previous quarter. This was due to the leverage effect on operating profit from significant sales growth alongside controlled selling and administrative expenses.

Sales and operating profit for the fourth quarter are expected to be 293.6 billion KRW and 103.2 billion KRW, respectively, representing decreases of 33.8% and 30.2% compared to the same period last year. A decline in COVID-19 confirmed cases and easing of quarantine measures are expected to inevitably lead to a downturn in diagnostic kit demand and performance.

However, the expanding demand for simultaneous COVID-19 and influenza diagnostic kits is expected to act as a variable. According to the U.S. Centers for Disease Control and Prevention (CDC), influenza cases in the U.S. have increased significantly compared to the same period last year, and the Japanese government has adjusted the COVID-19 disease classification to the same level as influenza to facilitate simultaneous COVID-19 and influenza quarantine measures.

Researcher Donggeon Lee of Shinhan Financial Investment said, “Unlike last year, as mask mandates have been lifted in most countries, we can expect an expansion in demand for simultaneous diagnostic kits,” adding, “Since simultaneous COVID-19 and influenza diagnostic kits have higher prices than COVID-19 diagnostic kits alone, the expansion of simultaneous diagnostic kit sales could contribute to overall corporate growth and profitability improvement.”

SD Biosensor’s price-to-earnings ratio (PER) based on expected net income attributable to controlling interests for next year stands at 5.5 times, continuing to be undervalued compared to global competitors. Researcher Donggeon Lee explained, “We expect business synergies from the acquisition of Meridian Bioscience and an increase in Non-COVID sales with the full-scale entry into the U.S. M10 market,” adding, “With sufficient mid- to long-term momentum such as strengthening global market dominance through the establishment of subsidiaries in Europe and Asia, attention to the stock price is warranted.”