Global Hearing Care Underpenetration And AI Signal Processing Will Drive Significant Upside Potential

Catalysts

About Demant

Demant develops and sells advanced hearing aids, hearing care services and diagnostic equipment worldwide.

What are the underlying business or industry changes driving this perspective?

• Demant is gaining global unit market share in hearing aids, supported by strong product reception such as Oticon Intent and improved performance in U.S. managed care and independent channels, which may accelerate revenue growth as market volumes normalize and high value channels expand their contribution to sales and earnings.
• The acquisition of KIND Group significantly strengthens Demant's retail footprint in Germany, creating a denser clinic network that can capture more first-time users and upgrades over time, potentially improving operating leverage, EBIT margins and cash flow as integration synergies are realized.
• Structural underpenetration in hearing care, combined with growing awareness and education efforts in markets like China, is enabling a shift toward higher value devices and professionalized care, which may support sustained ASP quality, higher gross profit per user and long term earnings growth despite temporary geographic mix pressure.
• Ongoing investments in new hearing aid introductions and AI driven signal processing position Demant to compete for share as customers cycle to next generation technology. This has the potential to improve product mix, support a return toward the upper end of the gross margin range and contribute to margin expansion over the medium term.
• Disciplined cost control, evidenced by flat sequential OpEx and strong working capital management, is creating a leaner base from which even modest market growth and share gains could deliver operating leverage, supporting the potential for higher EBIT margins, stronger free cash flow and increased capacity for future shareholder returns.

Assumptions

This narrative explores a more optimistic perspective on Demant compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Demant's revenue will grow by 10.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.8% today to 13.9% in 3 years time.
• The bullish analysts expect earnings to reach DKK 4.2 billion (and earnings per share of DKK 21.16) by about December 2028, up from DKK 2.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as DKK3.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, up from 17.4x today. This future PE is lower than the current PE for the GB Medical Equipment industry at 32.0x.
• The bullish analysts expect the number of shares outstanding to decline by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macroeconomic uncertainty and consumer cautiousness, particularly among senior citizens in key regions like Europe and North America, could structurally extend replacement cycles and delay first time adoption of hearing aids, capping unit growth and thereby constraining long term revenue and earnings.
• Ongoing unfavorable geographic mix, with higher growth in lower priced regions and weaker demand in high ASP markets such as the U.S. and parts of Europe, may structurally depress average selling prices and prevent a recovery toward the upper end of Demant's gross margin range, limiting future net margin expansion and EBIT growth.
• If investment hesitancy among clinics and hospitals in the U.S. and other developed markets becomes a more permanent feature, Diagnostics could remain structurally soft despite a good order book, delaying revenue recognition and reducing operating leverage, which would weigh on group EBIT margins and free cash flow.
• Intensifying competition in key channels, illustrated by share dilution at a large U.S. retailer and aggressive rival product launches, could further erode Demant's share in high value markets and force greater promotional or pricing pressure, negatively impacting revenue growth and compressing net margins over time.
• Continued foreign exchange headwinds and reliance on acquisitions to drive growth, combined with a gearing level already at the upper end of management’s target range, may limit flexibility for further M&A or share buybacks, reducing upside to earnings per share growth and constraining long term shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Demant is DKK316.0, which represents up to two standard deviations above the consensus price target of DKK271.65. This valuation is based on what can be assumed as the expectations of Demant's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK316.0, and the most bearish reporting a price target of just DKK195.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be DKK30.2 billion, earnings will come to DKK4.2 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of DKK217.8, the analyst price target of DKK316.0 is 31.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.