Revenio Q3'24: Slight increase in cost structure

Translation: Original published in Finnish on 11/1/2024 at 8:05 am EET.

We reiterate our Accumulate recommendation for Revenio with a target price of EUR 32.0. Q3 results were below our expectations, but the main reason for the disappointment was negative FX effects. However, our forecasts for the next few years have been lowered slightly as the company's cost structure has slightly ballooned, but we believe that the increased potential from the Thirona Retina acquisition more than offsets this. The valuation of the stock is very reasonable (2025e adjusted EV/EBIT 21x) if the company remains on track for earnings growth, but good performance is still required.

Currency effects slow growth and cost structure increases

Revenio's revenue growth in Q3 (+9%) was well below expectations, but the exchange rate-adjusted growth of 15% was in line with expectations. A better picture of the demand for Revenio's products is provided by comparable growth. In our view, the market got unnecessarily spooked by weak reported growth yesterday, just as it got overly excited about then-currency-driven growth in 2022. Sales of tonometers grew "very well" and growth in imaging devices was "in the double digits," so growth was apparently fairly balanced. EBIT in Q3 was 5.5 MEUR, significantly below expectations (7.0 MEUR). Approximately EUR 0.5 MEUR of the deviation is explained by currency effects, but the cost structure was still about 1 MEUR higher than expected. According to the company, 85% of the cost increase was due to higher marketing and personnel costs, the latter of which we of course tried to include in our estimates. Marketing costs were significantly higher due to product launches (ST500). In addition, the acquisition of Thirona Retina's AI software will weigh on profitability in the short term.

Small negative changes in the outlook for the next few good years

As expected, Revenio reaffirmed its guidance for 2024, expecting revenue growth of 5-10% at constant exchange rates and a good level of profitability excluding one-off items. Comparable revenue growth for Q1-Q3'24 was 8.9%, and the company should hit the guidance range without any problems. Ophthalmic market growth was modest at the beginning of the year, but Revenio has performed well this year. There were small negative changes in potential future value drivers as HOME2 did not receive a separate reimbursement code in the US and the FDA submission for an AI partner (iCare as a DRSplus device) is likely to be delayed until next year. Revenio's FDA submission for its proprietary ILLUME solution appears to be on track and, if successful, could be approved by the end of 2025. Similarly, iCare MAIA microperimeter development is well underway and the company continues to expect first commercial shipments in early 2025. On the other hand, we now include the Thirona acquisition in our forecasts, which compensates for small dents in the growth outlook. However, Thirona is increasing costs, which has lowered our 2025 earnings forecasts by about 5%.

Valuation requires staying on earnings growth track

Assuming next year's earnings growth materializes, Revenio's valuation (2025e adjusted EV/EBIT 21x) is attractive, but the investor should be compensated for bearing the forecast risk even if the valuation assumes earnings growth. Overall, the long-term potential offered by the acquisition of the highly affordable Thirona AI software offsets the slightly lower forecasts and minor weaknesses in the outlook. In our view, the relative valuation is very reasonable if Revenio, one of the best companies in the peer group, is priced in line with the median (2025e). In our view, the risk/reward of the stock is still quite attractive.