Bittium extensive report: Gaining success from defense

We raise our target price for Bittium to EUR 7.2 (was EUR 6.5) and our recommendation to Accumulate (previous Reduce). After a long struggle, the company is making a strong profitability turnaround in 2024, and the earnings growth outlook is also very strong for the coming years as the defense sector recovers. The Defense & Security segment has become by far the most valuable business for Bittium, but the Medical segment also offers very good prospects. Given the medium-term outlook, we believe the valuation remains reasonable.

Coming out of a major transformation process and huge investments

Bittium has invested more than 150 MEUR in R&D over the last eight years. The largest investment has been in the Bittium Tough SDR product line, which complements the company's tactical communications offering for the defense sector. Deliveries are still low, but we expect the volume phase for the Finnish Defence Forces to start in 2025, and there is also significant potential in Austria. In addition, the company has invested significantly in the Medical segment, which focuses on biosignal measuring and remote monitoring, and has seen a slowdown in recent years as revenue has continued to be focused on the BSCDx partnership. However, the market drivers are strong and sleep apnea is coming alongside cardiology, so the outlook in this area is also encouraging. In addition to the largely product-based Defense & Security and Medical businesses, Bittium continues to have an Engineering Services segment that provides R&D services and focuses on high value-added connectivity solutions.

Profitability turnaround in full swing, with profitable growth expected in the coming years

Bittium is in the process of making a strong profitability turnaround this year, building on the efficiency and profitability improvement measures taken last year. In a nutshell, the company has transformed from a product development organization to a profitable growth company. We are forecasting revenue growth of more than 15% to around 87 MEUR (guidance 85-95 MEUR) and an operating result of 8.9 MEUR (guidance 7.0-9.5 MEUR) in 2024, which already showed first signs in Q1. The year-on-year improvement is strong and we expect this to kick-start profitable growth in the coming years. We anticipate strong revenue growth in 2025, mainly driven by the projected launch of Tough SDR volume shipments, as profitability scales with product volume. Next year, we also expect FDA approval for Bittium Respiro, which would open up the high-potential sleep apnea market for the Medical segment. The high level of activity and competitive products in the defense sector offer opportunities for new breakthroughs in international markets (Austria and Estonia opened so far).

Valuation supported by defense sector tailwind and strengthening cash flows

We estimate the fair value of Bittium’s share to be in the range of EUR 6.0-8.0 (previously EUR 5.5-7.5). The upper end of the range can be exceeded by new breakthroughs, so there is positive optionality in the stock. On the other hand, the lower end of the range is realistic if earnings growth falls significantly short of expectations in the coming years. The sum-of-the-parts calculation based on the 2025 projections yields a value of around EUR 7.2, with the value concentrated in the Defense & Security segment (~60%) and the Medical segment (~27%). In our view, the biggest risk lies with the largest customers, the Finnish Defence Forces and Boston Scientific, but the risk will decrease further, especially after the partnership agreement with the Defence Forces. As working capital, which has ballooned uncontrollably in recent years, is released and investments decline, cash flow should strengthen significantly in the coming years, and we forecast cash flows well ahead of reported results.