UDG Healthcare
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UDG Healthcare |
Strong Q1 trading and pending divestment |
Q116 trading update |
Healthcare equipment & services |
9 February 2016 |
Share price performance
Business description
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Analysts
UDG Healthcare is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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