Philips’ China misery renews case for bold surgery
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Johnson
LONDON, Oct 28 (Reuters Breakingviews) -Koninklijke Philips’ PHG.AS Chinese problems may accelerate a breakup. The 23 billion euro Dutch medical group’s shares fell as much as 17% on Monday after it said sales may barely grow this year. The increasingly grim outlook reinforces the case for CEO Roy Jakobs to separate his consumer and medical diagnostic divisions.
Things were looking up for the Amsterdam-based conglomerate. The shares rallied in April after it agreed to pay $1.1 bln to settle lawsuits in the U.S. relating to potentially faulty sleep apnoea machines. It received another vote of confidence in June when Exor, the investment vehicle of Italy’s Agnelli family, upped its stake from 15% to 17.5%.
Yet on Monday, Jakobs said that sales this year may grow by just 0.5% to 1.5%, down from a target of 3% to 5%. Revenue in its personal health division, which makes toothbrushes and air purifiers, fell 5%, in the third quarter thanks to a steep decline in demand from Chinese shoppers.
That’s at least consistent with the challenges that other consumer-facing companies, from carmaker Mercedes-Benz MBGn.DE to luxury group Kering PRTP.PA are facing in the world’s second-largest economy. More worrying is the fact that China’s hospitals are also putting the brake on critical items, like MRI machines, affecting Philips' core diagnostics business. Jakobs says this was partly due to a government anti-corruption drive. The risk is that the slump endures beyond 2024. That may explain the steep share price fall, even though the lowered sales guidance may trim just 3% off Philips’ earnings before interest tax and amortisation this year, according to JPMorgan analysts.
Stagnant sales may make it harder for Jakobs to boost Philips’ profitability. It’s diagnostic and treatment business before Monday was expected to convert some 15% of its sales into EBITDA this year, according to Visible Alpha forecasts, whereas peer Siemens Healthineers SHLG.DE is expected to make a margin of nearly 20%. That’s reflected in a lowly valuation: including debt, Philips is currently valued at less than 9 times 2025 EBITDA, whereas Healthineers is worth nearly 14 times, using Visible Alpha data.
The valuation discount, and the fact that there are few synergies between Philips’ two core divisions of consumer goods and medical devices, mean it is hard to justify keeping those units in one company. With both businesses now struggling, the case for a breakup looks even more compelling.
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CONTEXT NEWS
Koninklijke Philips on Oct. 28 cut its full-year sales outlook following a significant deterioration in demand from hospitals and consumers in China.
Philips said revenue will grow by just 0.5% to 1.5% in 2024, down from a previous forecast of 3% to 5%. The company expects all other regions outside of China to align with the prior guidance.
Comparable third-quarter sales in its personal health division were down 5% year-on-year due to falling sales in the world’s second-largest economy. Meanwhile, revenue in the diagnosis and treatment business was down 1% overall – compared to 14% growth seen in the third quarter of last year.
It attributed the slowdown in part to an ongoing anti-corruption drive in China, which is delaying equipment orders.
Philips shares fell by as much as 17% in morning trading on Oct. 28, and were at 24.61 euros as of 0856 GMT.
Philips' total return has lagged Siemens Healthineers https://reut.rs/4fp1rlP
Editing by Neil Unmack and Streisand Neto
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