Morning Note: Market news and an update from hearing aid company Sonova.

Market News

US equity markets moved higher last night – S&P 500 (0.7%); Nasdaq (+1.1%) – and hit their highest closing level since the end of July. Microsoft hit a record high. The FTSE 100 is currently trading 0.4% lower at 7,468.

This morning in Asia, markets were little changed: Nikkei 225 (-0.1%); Hang Seng (-0.3%); Shanghai Composite (flat).

A Reuters poll shows the Nikkei is seen rising to 35,000 by mid-2024 on earnings boost, vs 33,350 currently. A gauge of China developers gained as much as 7.6%, and is poised for the biggest increase since September after Bloomberg reported that regulators are drafting a list of 50 developers eligible for a range of financing.

The US Treasury Department reported solid demand for its $16bn sale of 20-year Treasuries. Benchmark Treasuries held gains – the 10-year currently yields 4.40%. Gold rallied to $1,988 an ounce.

UK government borrowing was £14.9bn in October. Against that backdrop, the Bank of England Governor warned that UK rates may have to rise again, and that food and energy costs remain an upside risk to the inflation outlook. Sterling currently trades at $1.2531 and €1.1447.

Oil trades at $81.60 a barrel amid speculation that OPEC+ could deepen output curbs when meeting this weekend.

Source: Bloomberg

Company News

Sonova has this morning has released its results for the half-year to 30 September 2023. In response, the shares have been marked up 6%.

Sonova is a leading global provider of hearing care solutions, with brands including Phonak, Unitron, Advanced Bionics, Sennhesier (under licence) and AudioNova. The Switzerland-based company operates a vertically integrated strategy, operating through four core businesses – hearing instruments, audiological care, consumer hearing, and cochlear implants – along the entire value chain of the hearing care market. The group’s sales and distribution network, the widest in the industry, comprises over 50 own wholesale companies and more than 100 independent distributors. This is complemented by Sonova’s audiological care business, which offers professional audiological services through a global network. In its latest financial year, the group generated net profit of CHF 270m from sales of CHF 3.7bn.

The group operates in an attractive market, which is poised for further growth. Penetration rates in the mild to moderate category are still low, developed countries are seeing increasing demand from the baby boomer generation and developing countries are beginning to bridge the gap in hearing care provision. The cochlear implants market is expanding from being mostly children born with hearing loss to adults whose hearing loss has become too severe to be treated only with hearing aids. The group’s increased emphasis on connectivity and digital applications provides an additional source of growth. The aim is to generate above-market growth – which the group assumes will be 4%-6% p.a. – and long-term margin expansion.

During the latest half-year, group sales rose by 1.6% at constant currency to CHF 1,753m. A strong Swiss franc meant that sales fell by 5.1% in actual currency terms. In organic terms, sales fell by 0.4%.

After a slow start, the overall hearing care market gradually improved, in part helped by an easing comparison base. As anticipated, however, growth was held back by the non-renewal of a large contract with a single US customer and temporary operational challenges. Excluding the impact of the large contract, organic sales grew by 3.0%.

By division, the hearing instruments segment generated modest growth (+1.8%), consumer hearing fell 1.9%, audiological care was up 5.7%, and cochlear implants fell 0.9%.

The APAC region was the strongest performer, up 7.8%. The EMEA region, the group’s largest, grew by 4.8% supported by the continued expansion of the audiological care network. The US fell by 4.6% due to the contact issue highlighted above, while Americas (ex US) fell by 1.2%.

The business generates a very high gross margin, up 2.8 percentage points to 71.6%. Growth was supported by prior-year price increases implemented to offset inflationary pressures as well as a shift in the business mix due to the strong growth in the audiological care business. The development was further helped by a gradual easing of headwinds from transport and component costs. Adjusted operating profit (EBITA) grew by 2.5% to CHF 350m, with the margin up 20 basis points in constant currency to 20.0%.

Operating free cash flow fell by 18.8% to CHF 150.5m. The group spent CHF 59.9m on acquisitions during the period, reflecting the further expansion of its audiological care network. Net debt rose from CHF 1.5bn to CHF 1.7bn, with the net debt/EBITDA ratio reaching 1.8x, just above the target range of 1.0-1.5x due to seasonal factors. The dividend was raised by 5%.

Although the group is part-way through a three-year share buyback programme of up to CHF 1.5bn from April 2022 until April 2025, no shares bought back in the current period and no repurchases are foreseen in the second half of the financial year.

Looking forward, continued strong execution in the audiological care business, a further strengthening of the hearing care market and improving momentum in the hearing instruments business provide a solid foundation for a substantial acceleration in sales growth in the second half. For the financial year to end March 2024, the company continues to expect consolidated sales to grow by 3%-7% at constant exchange rates. However, reflecting higher investments to sustain the positive trajectory, adjusted operating profit is now expected to increase by 4-8% at constant exchange rates, versus 6%-10% previously. This implies a continued margin expansion in the second half.

Source: Bloomberg