UDG Healthcare — Update 10 October 2016

UDG Healthcare — Update 10 October 2016

UDG Healthcare

Written by

Andrey Litvin

Energy and Resources Analyst

UDG Healthcare

Investor day feedback: Markets, Margins, M&A

Capital markets day

Healthcare equipment & services

10 October 2016

Price

634p

Market cap

£1,562m

£/€1.12

Net debt (€m) at H116

246

Shares in issue

246.4m

Free float

100%

Code

UDG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.9)

9.2

26.2

Rel (local)

(4.1)

0.4

14.5

52-week high/low

650.00p

460.30p

Business description

UDG Healthcare is a leading international provider of services to healthcare manufacturers and pharmacies. It employs more than 8,000 staff and is present in 22 countries. It operates across three divisions: Ashfield Commercial & Medical Services, Sharp Packaging Services and Aquilant.

Next events

Preliminary FY16 results

24 November 2016

Analysts

Andrey Litvin

+44 (0)20 3077 5755

UDG Healthcare is a research client of Edison Investment Research Limited

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
(€m)

EPS
(c)

DPS
(c)

P/E
(x)

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by UDG Healthcare and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by UDG Healthcare and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Energy & Resources

Egdon Resources — Update 10 October 2016

Egdon Resources

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