Strong Q1 trading and pending divestment

UDG Healthcare 9 February 2016 Update

UDG Healthcare

Strong Q1 trading and pending divestment

Q116 trading update

Healthcare equipment & services

9 February 2016

Price

507.0p

Market cap

£1,242m

€1.30/£, $1.09/€

Net debt (€m) at 30 September 2015

196

Shares in issue

244.9m

Free float

100%

Code

UDG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.0)

4.5

17.4

Rel (local)

(7.9)

16.4

38.2

52-week high/low

598.8p

425.8p

Business description

UDG Healthcare is a leading international provider of services to healthcare manufacturers and pharmacies. It employs 8,000 staff and is present in 20 countries. It operates through three divisions: Ashfield Commercial & Medical Services, Sharp Packaging and Supply Chain Services.

Next events

Half-year results

19 May 2016

Closure of drug distribution disposal

June 2016

Analysts

Hans Bostrom

+44 (0)20 3681 2522

Christian Glennie

+44 (0)20 3077 5727

UDG Healthcare is a research client of Edison Investment Research Limited

UDG Healthcare sustained strong operating performance in Q1 (October to December 2015) in its core Sharp and Ashfield divisions, while the sale of drug distribution remains on track for June. Our revised numbers reflect the restatement of FY15 accounts and £ weakness with a 1-2% impact on underlying FY16-17e profits. Our 521-649p valuation is sensitive to M&A.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

09/15

919

84

27.4

11.0

24.1

1.7

09/16e

1,016

91

29.7

11.4

22.2

1.7

09/17e

1,056

103

32.8

12.0

20.1

1.8

09/18e

1,124

115

36.1

12.6

18.3

1.9

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Restated accounts exclude businesses for sale as at FY15.

Strong start to FY16 driven by ongoing businesses

Q116 trading was well ahead of the previous year, buoyed by the ongoing healthcare outsourcing activities (Ashfield, Aquilant and Sharp). Ashfield’s profit growth was spurred by recent contract wins in the US and EU commercial activities and solid growth in healthcare communications. Ashfield’s UK business saw profit growth slow, due to a maturing market and intensified competition. We forecast 3% FY16 divisional profit growth including overheads from disposed activities.

Sharp well-invested for next phase of growth

Sharp sustained double-digit growth as it continues to benefit from strong demand for its specialist pharma packaging services in the US, while restructuring its break-even European arm is making incremental progress. Additional US capacity is due to come on stream in H2, which we forecast to temper the divisional operating margin by 80bp in FY16, but to offer a platform for low-teens sales growth medium term. We forecast 8% divisional profit growth in FY16 including extra overheads.

£ weakness tempers the positive FX effect in FY16e

UDG expects 6-8% growth in continuing business FY16e EPS, consistent with our divisional forecasts. Factoring in the recent 6% weakening of sterling vs the euro (35% of group profits in £), we lower the expected positive FX effect from 5% to 3% in FY16 and see a negative 1% impact in FY17. Our sensitivity analysis suggests EPS CAGR FY15-20e, now forecast at 4.4%, will be boosted by 1.5pp for every €100m reinvested at 11x EBIT. Following the planned €408m divestment, UDG should be able to reinvest up to €700m using cash and debt. This would boost FY20e EPS by 32% vs pre-disposal.

Valuation range 521-649p sensitive to reinvestment

Our DCF-based valuation range takes into account the initial earnings dilution from divesting the drug distribution activities and the potential to create value through raised investments, while excluding synergies and a potential reduction in financing costs. Updating the valuation at a lower £ rate offsets the 1-2% profit downgrade. Our valuation range remains 521p (no acquisitions) to 649p (€700m reinvestment at 11x EBIT). We consider UDG’s 1.7% dividend yield attractive vs 0.6% for peers.

Exhibit 1: Financial summary

€m

2014

2015

2016e

2017e

2018e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,127

919

1,016

1,056

1,124

Cost of Sales

(1,762)

(582)

(666)

(691)

(736)

Gross Profit

365

338

351

364

388

EBITDA

 

 

123

114

121

130

142

Operating Profit (before GW and except)

 

 

103

97

102

111

122

Intangible Amortisation

(16)

(15)

(15)

(16)

(17)

Exceptionals

54

(13)

190

0

0

Operating Profit

141

69

277

96

105

Other

0

0

0

0

0

Net Interest

(16)

(13)

(11)

(8)

(7)

Profit Before Tax (norm)

 

 

87

84

91

103

115

Profit Before Tax (FRS 3)

 

 

125

56

266

87

98

Tax

(14)

(14)

(18)

(21)

(24)

Profit After Tax (norm)

70

67

73

82

91

Profit After Tax (FRS 3)

111

42

248

66

74

Profit After Tax (discontinued operations)

-

13

13

-

-

Average Number of Shares Outstanding (m)

241.7

244.2

246.2

248.2

250.2

EPS - normalised fully diluted (c)

 

 

28.8

27.4

29.7

32.8

36.1

EPS - FRS 3 © - including discontinued operations

 

45.7

17.1

86.6

26.6

29.5

Dividend per share (c)

10.1

11.0

11.4

12.0

12.6

Gross Margin (%)

17.2%

36.7%

34.5%

34.5%

34.5%

EBITDA Margin (%)

5.8%

12.4%

11.9%

12.3%

12.7%

Operating Margin (before GW and except.) (%)

4.8%

10.6%

10.1%

10.5%

10.9%

BALANCE SHEET

Fixed Assets

 

 

698

640

641

646

652

Intangible Assets

490

460

457

455

453

Tangible Assets

174

118

124

130

138

Other

34

62

61

61

61

Current Assets

 

 

738

955

710

720

739

Stocks

168

55

61

63

67

Debtors

407

205

213

222

236

Cash

160

214

434

434

434

Other (2015: Including assets held for sale)

3

480

1

1

1

Current Liabilities

 

 

(435)

(516)

(257)

(265)

(280)

Creditors

(426)

(196)

(217)

(226)

(240)

Short term borrowings

(2)

(21)

(21)

(21)

(21)

Short term leases

0

0

0

0

0

Other (2015: Including liabilities held for sale)

(7)

(299)

(19)

(19)

(19)

Long Term Liabilities

 

 

(468)

(443)

(290)

(262)

(225)

Long term borrowings

(405)

(416)

(251)

(227)

(191)

Long term leases

0

27

0

0

0

Other long term liabilities

(63)

(54)

(39)

(34)

(34)

Net Assets

 

 

534

636

804

840

886

CASH FLOW

Operating Cash Flow

 

 

93

165

119

123

138

Net Interest

(15)

(12)

(11)

(9)

(8)

Tax

(14)

(15)

(19)

(18)

(21)

Capex

(38)

(65)

(65)

(39)

(41)

Acquisitions/disposals

(11)

(4)

378

0

0

Financing

2

5

0

0

0

Dividends

(23)

(25)

(27)

(28)

(30)

Other

9

0

(15)

(5)

0

Net Cash Flow

3

49

359

24

38

Opening net debt/(cash)

 

 

217

246

196

(163)

(186)

HP finance leases initiated

(13)

0

0

-

-

Other

(18.0)

1

(1)

(1)

Closing net debt/(cash)

 

 

246

196

(163)

(186)

(224)

Source: UDG Healthcare, Edison Investment Research estimates. Note: Accounts have been restated from FY15 to exclude the drug distribution assets held for sale. Previously, our accounts reflected their consolidation until the expected sales date 30 June 2016.

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