Biohit extensive report: Profitable growth through diagnostics

Translation: Original published in Finnish on 1/14/2025 at 7:19 pm EET.

Biohit is focused on diagnostics of the gastrointestinal tract and health-promoting products. The company has achieved a successful turnaround and is targeting strong growth of 15-20% over the 2024-28 strategy period. We expect the company's earnings to continue to grow in the coming years, supported by the development of new markets and the introduction of new products. We raise our target price to EUR 3.2 (was EUR 2.9) EUR 2.9) on the back of our forecast revisions but lower our recommendation to Reduce (was Buy) due to the deterioration in the risk/reward ratio caused by the recent price rally.

Biotechnology company focused on diagnostics of the gastrointestinal tract

Biohit's product portfolio includes about ten diagnostic tests to determine the pathology behind gastrointestinal tract symptoms. The company's spearhead product family is the GastroPanel® set of four tests that indicate stomach health. Biohit has launched two quick test versions of the product in recent years, which are expected to drive growth in the company's key markets of China, the UK, the EU and the Middle East. The diagnostic tests are supported by Acetium® products that bind toxic acetaldehyde.

From a successful turnaround to profitable growth

Biohit has been loss-making for most of the past decade, but thanks to revenue growth, cost control, and operational improvements, it managed to turn a profit in 2022. The favorable development has continued and the company's profile has matured from a turnaround company to a defensive and profitable growth company. With the strategy 2024-28, announced at the end of 2023, Biohit aims for strong annual growth of 15-20% and EBIT of at least 10%. We believe the growth target is ambitious but achievable, even with growth in the first strategic year (2024) landing below target. The profitability target is moderate and reflects the company's growth mode, where profitability will be slightly compromised if necessary to achieve growth. We estimate the long-term profitability potential to be closer to 20%, based on high gross margins, a niche product portfolio and the long-term average profitability of mature companies in the sector.

We expect healthy growth with new versions of GastroPanel® and geographical expansion

In the short term, we believe business visibility is moderate but quickly becomes blurred in the medium term. We forecast revenue growth of around 14% CAGR in 2024-26, driven by sales of the new GastroPanel® quick tests and the entry to a market, which the company expects to take place in mid-2025. We expect EBIT to continue to grow to 3.1 MEUR by 2026. Our earnings forecast is based on revenue growth and continued tight cost control. With a very strong balance sheet and positive cash flow estimates, we expect an annual dividend yield of about 1-2% from 2025 onwards, although the company has not yet decided to pay a dividend.

The stock is correctly priced

On our estimates that include strong growth, the P/E multiple for the stock in 2025 is 21x and the EV/EBIT multiple is 15x, which is in the middle of our estimated fair value range of 12x-18x. The multiples are slightly below global large-cap peers, which we believe is justified by Biohit's higher risk profile. In our view, the stock is also fully priced in terms of EV/S (2025e: 2.4x) and DCF. In our view, the valuation is not unduly high and we believe the stock is roughly priced correctly. However, the lack of a margin of safety means that the risk/reward ratio is still too low, so we are staying on the sidelines for a better buying opportunity.