UDG Healthcare
UDG Healthcare |
Investor day feedback: Markets, Margins, M&A |
Capital markets day |
Healthcare equipment & services |
10 October 2016 |
Share price performance
Business description
Next events
Analysts
UDG Healthcare is a research client of Edison Investment Research Limited |
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UDG held a capital markets day on 27 September hosted by senior management across all divisions and regions. Below we discuss our key takeaways from this meeting.
Year end |
Revenue (€m) |
EBITDA |
EPS |
DPS |
P/E |
Yield |
09/14 |
764.2 |
97.7 |
23.2 |
10.1 |
27.3 |
1.6 |
09/15 |
919.3 |
126.1 |
27.4 |
11.0 |
23.1 |
1.7 |
09/16e |
974.9 |
128.8 |
28.6 |
11.5 |
22.2 |
1.8 |
09/17e |
1,020.2 |
134.6 |
31.1 |
12.5 |
20.4 |
2.0 |
Note: EPS is normalised, excluding amortisation of acquired intangibles, exceptional items.
Ashfield: Looking for gradual margin expansion
Ashfield is expected to contribute c 60% of UDG’s profits in 2016, with c 50% of business represented by the commercial & clinical segment and c 50% by healthcare communications. The UK is the most mature market with the highest outsourcing rates. The key focus is on the US, EU and Japan. Japan is the youngest market with the lowest outsourcing rates of 6.0-6.5%; UDG expects these to double by 2020/22. Ashfield’s current operating margin of 12% after ‘pass-through’ costs is seen gradually growing thanks to the mix effect. Margins vary across businesses, with c 8-9% in commercial & clinical and mid-to-high teens in ‘comms’. Within the commercial segment, clinical solutions and call centres tend to generate higher margins and will be the focus for growth in the future.
Sharp Packaging: M&A to support organic growth
Medium-term constant currency operating profit growth is guided at 10% pa. Market expansion in packaging is seen at 5-10%, while clinical services enjoy up to 10% growth. UDG recognises the need for both organic and M&A-led growth in clinical services in order to upscale the business and win larger pharma customers. Further, it is considering investing in its own facilities in the EU and US as current facilities are leased. In packaging, UDG is looking for more opportunities to grow capacity following the recently completed expansion. Medicine serialisation is seen as an important driver in light of upcoming regulation in the US and EU.
Prudent M&A remains a priority
UDG is actively looking for M&A opportunities, but maintains a prudent approach with 15% ROCE target and is unlikely to pay double-digit EBITDA multiples. The key regions are North America and Japan. The company considers 2.0x net debt-to-EBITDA as comfortable, suggesting that there is capacity to borrow in total up to €600m in debt in addition to the recent M&A proceeds and cash on hand (Edison FY16 net cash estimate of €146m).
Valuation: Shares to remain well supported
We maintain our valuation of £6.45/share, despite the strong price run. We note that if the company is unable to find attractive M&A targets within 12 months it may consider returning funds to shareholders. This, coupled with positive operational momentum, should continue to support shares.
Exhibit 1: Financial summary
€m |
2014 |
2015 |
2016e |
2017e |
2018e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
764 |
919 |
975 |
1,020 |
1,057 |
Cost of Sales |
(497) |
(582) |
(624) |
(653) |
(677) |
||
Gross Profit |
267 |
338 |
351 |
367 |
381 |
||
EBITDA |
|
|
98 |
126 |
129 |
135 |
139 |
Operating Profit (before GW and except) |
|
|
75 |
99 |
107 |
112 |
116 |
Intangible Amortisation |
(16) |
(19) |
(19) |
(19) |
(20) |
||
Exceptionals |
62 |
(15) |
183 |
0 |
0 |
||
Operating Profit |
124 |
69 |
275 |
96 |
99 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Net Interest |
(16) |
(13) |
(11) |
4 |
5 |
||
Profit Before Tax (norm) |
|
|
46 |
70 |
81 |
100 |
104 |
Profit Before Tax (IFRS) |
|
|
108 |
56 |
264 |
100 |
104 |
Tax (cont. operations) |
(10) |
(16) |
(18) |
(23) |
(24) |
||
Net profit from cont. operations after tax (norm) |
36 |
54 |
63 |
77 |
80 |
||
Net profit from cont. operations after tax (IFRS) |
98 |
42 |
246 |
77 |
80 |
||
Profit After Tax (discontinued operations) |
13 |
13 |
9 |
0 |
0 |
||
Minority interest |
0 |
0 |
0 |
0 |
0 |
||
Net profit for the period (norm) |
56 |
67 |
71 |
77 |
80 |
||
Net profit for the period (IFRS) |
110 |
55 |
255 |
77 |
80 |
||
Average Number of Shares Outstanding (m) |
242 |
244 |
246 |
246 |
246 |
||
EPS from cont. operations - normalised fully diluted (c) |
|
|
14.7 |
22.1 |
25.3 |
31.1 |
32.3 |
EPS - normalised fully diluted (c) |
|
|
23.2 |
27.4 |
28.6 |
31.1 |
32.3 |
Dividend per share (c) |
10.1 |
11.0 |
11.5 |
12.5 |
13.0 |
||
Gross Margin (%) |
35.0% |
36.7% |
36.0% |
36.0% |
36.0% |
||
EBITDA Margin (%) |
12.8% |
13.7% |
13.2% |
13.2% |
13.2% |
||
Operating Margin (before GW and except.) (%) |
9.9% |
10.7% |
11.0% |
10.9% |
10.9% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
698 |
640 |
682 |
702 |
717 |
Intangible Assets |
490 |
460 |
467 |
468 |
469 |
||
Tangible Assets |
174 |
118 |
144 |
156 |
162 |
||
Other |
34 |
62 |
70 |
78 |
86 |
||
Current Assets |
|
|
738 |
955 |
726 |
761 |
802 |
Stocks |
168 |
55 |
58 |
61 |
63 |
||
Debtors |
407 |
205 |
218 |
228 |
236 |
||
Cash |
160 |
214 |
443 |
466 |
496 |
||
Other (2015: Including assets held for sale) |
3 |
480 |
6 |
6 |
6 |
||
Current Liabilities |
|
|
(434) |
(516) |
(250) |
(259) |
(267) |
Creditors |
(422) |
(192) |
(206) |
(215) |
(223) |
||
Other (2015: Including liabilities held for sale) |
(12) |
(324) |
(44) |
(44) |
(44) |
||
Long Term Liabilities |
|
|
(468) |
(470) |
(331) |
(331) |
(331) |
Long term borrowings |
(391) |
(416) |
(277) |
(277) |
(277) |
||
Other long term liabilities |
(76) |
(54) |
(54) |
(54) |
(54) |
||
Net Assets |
|
|
534 |
609 |
827 |
873 |
921 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
93 |
165 |
124 |
128 |
134 |
Net Interest |
(15) |
(12) |
(11) |
4 |
5 |
||
Tax |
(14) |
(15) |
(18) |
(23) |
(24) |
||
Capex |
(38) |
(65) |
(58) |
(51) |
(48) |
||
Acquisitions/disposals |
(93) |
2 |
365 |
0 |
0 |
||
Financing |
2 |
5 |
0 |
0 |
0 |
||
Dividends |
(23) |
(25) |
(28) |
(31) |
(32) |
||
Other |
92 |
(6) |
(5) |
(5) |
(5) |
||
Net Cash Flow |
3 |
49 |
368 |
23 |
30 |
||
Opening net debt/(cash) |
|
|
256 |
246 |
223 |
(146) |
(168) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
7 |
(26) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
246 |
223 |
(146) |
(168) |
(198) |
Source: UDG, Edison Investment Research
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Research: Energy & Resources
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