Edinburgh University Trading and Investment Club
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1 Edinburgh University Trading and Investment Club Healthcare: Healthcare plc Asset Name Ticket Symbol Market Analysts Sector-Heads Sub-Industry healthcare plc :LSE London stock exchange George Coulter, Hassan Ashraf, Victor Hoet Ben Saddler, Juan Matias Healthcare Company Overview is a pre-wholesaling and contract logistics company, specialising in Pharmaceuticals, Healthcare, Veterinary and Consumer Products with the target of becoming the UK s biggest healthcare supply chain service. Recommendation Buy Target Stop Loss Allocation 160 shares Drivers 1. Healthcare product manufacturers are increasingly compelled to improve their efficiency. To do this they must reduce fixed costs and consequently opt for outsourcing options, such as the ones offers. 2. The constant growth and continuity of s commitment to its target of becoming the UK s biggest healthcare supply chain service. With a strong field of management and board, and promising financials, has the potential to proceed with this target. Contents Company Profile... 2 Industry Analysis... 3 Financial Analysis... 4 Currency... 5 Valuation... 6 DCF valuation and sensitivity analysis... 6 Investment Risks... 7 Investment Decision... 7 Key Figures Price P/E Div Yield 2.43% Mkt cap EPS 1.14 bil GDP Margin 5.19% D/E 8.02 ROE 23.16% ROA 11.93% Beta Empl d 8300 DCF VALUATION ( m) Present value of FCFs Terminal value 1, Terminal growth rate 1.25% PV of terminal value 1, Total 1, value Net debt/(cash) (2014e) Equity value 1, Total number of shares (m) Value per share( ) 3.85 upside/downside 18% source: Edison Investment Research, Bloomberg
2 Research Report Healthcare and Galliard will help them gain scientific expertise which will benefit other sections of the company. has considerable long-term funds and financing capabilities which will help them achieve their growth objectives. They expect to achieve a growth operating profit h in This will be due to the strong growth trend in Ashfield and Sharp. We remain very positive about our future growth prospects. Company Profile Operations 1. Ashfield Commercial & Medical Services Ashfield Commercial & Medical Services outsources multi-channel communications to healthcare professionals and patients. Ashfield is a global leader in this and operates in continental Europe, the UK, North America, Japan and South America. Ashfield Commercial & Medical Services offers outsourcing services in: Sales and marketing services Healthcare communications Event management Medical affairs and regulatory services 2. Supply chain services One supply chain service offered by Healthcare plc is called United Drug Supply Chain Services. This provides logistical and distribution services for pharmaceutical, biotech and consumer companies. This part of the company operates in the Republic of Ireland and Northern Ireland. Another supply chain is Aquilant Specialist Healthcare Services. This business is a distributor of specialist medical and scientific products. It also provides outsourced sales, marketing, distribution and engineering services to its clients. Aquilant Specialist operates in the Republic of Ireland, the UK and the Netherlands. 3. s packaging service Sharp Packaging Services provides clinical and commercial packaging, storage, logistics and project management services to the pharmaceutical and biotech industry. It has plants both in North America and Europe. have been successful in their previous targets. This can be seen by how much they have grown and the fact that they have made consistent acquisitions that have allowed them to gain a more global influence. Although the market in Ireland is still undergoing a difficult stage, 70% of their profit comes from Ashfield and Sharp. Both of these have been growing strongly and are expected to continue to succeed. This will allow them to achieve their goals. Management and Shareholders The company has a very respectable and trustworthy management team. The COO has been with the company since During this time has grown massively to become a major international player in healthcare outsourcing. Additionally, the CFO has been with the company for a significant number of years and most of the management has extensive experience in healthcare companies outside of, as many of them have served as executives in other pharmaceutical companies. Shareholders Shareholders of are primarily investment firms and asset management companies. M&G Investments are the largest stake holders with 24.1m shares amounting to 9.87% of the total equity. Other similar groups own 37.6% of the business. As there is no clear dominant shareholder, the company is effectively controlled by the managers and the chairman. Global Presence Healthcare, which employees 8,300 people across 20 countries, has a very global presence with operations in Europe, Asia, North and South America. Source: annual report 2014 Corporate Strategy aims to continue as they believe it will enable each division to sell services more successfully in what they believe is a rapidly changing market. They hope to facilitate more effective cross-selling, both within and across business units. The acquisition of KP360 2
3 Metrics Healthcare plc Mrkt Cap Industry Analysis Research Report Healthcare General Multiples Efficiency & margins Growth Liquidity Beta EPS D/E Div yield PEG P/E P/B ROE Gross Margin Net Margin Revenue Growth (5 yrs) EPS Growth (5 yrs) Quick Ratio Interest Cover 1.14B % Or 23.16% 17.16% 5.19% 23.8% 26.11% Celesio AG 4.06B % P/S 3.17% 10.84% 0.38% -0.9% ompetitor / / / / / / / / / / / / / / / Industry Competitiveness On the whole, most countries operates in are moving towards a more competitive stance in terms of their healthcare providers. The Pharmaceutical industry in particular is expanding as more players enter the market. Outsourcing for pharmaceuticals has consequently attracted many new entrants. Despite the competition, continues to grow and is becoming one of the most important actors in the market. Celesio AG, a provider of services for the pharmaceutical sector, is s primary competitor. Even if Celesio AG occupies a bigger part in the market with a market cap of 4.06B, it has recently shown instability and declining growth on the stock market, and does not compete with closely in terms of its financial data. In the short run, Celesio AG does not seem to pose a major threat to Healthcare. Future of the Industry The market for outsourcing in the commercial healthcare sector grows by 6-8% per year (Edison research, Bloomberg). The healthcare industry (along with the pharmaceutical industry) is forecast to continue growing substantially in the next few decades. The main reasons for this are, on one hand increasing lifespans (therefor increasing the need for healthcare), and also the continuous development of medical technology. With the growth of the healthcare sector, outsourcing and the demand for commercial solutions in pharmacies and hospitals have also grown. Healthcare has benefited from these growing outsourcing trends, and is well placed as demand for its services continue to grow along with the industry. Sources: Edison report (), Bloomberg Ft.markets.com Fundamentals of the Industry The growing demand for outsourcing and commercial solutions from pharmaceuticals is the industry s main driver. The main cause for this are healthcare companies seeking to improve efficiency and to lower their fixed costs; the outsourcing offers allows these companies to do so. The establishment of Supply chains are also fundamental in how companies operate in the industry, ensuring companies may achieve economies of scale. Strength - Growing outsourcing trends - Supply chains for growth Opportunities With growing demand for and other companies services in outsourcing, the outsourcing business has the opportunity to expand, especially with the help of globalisation as companies scatter around the world and tend to rely increasingly on outsourcing ( pharmaceuticals in this case). Weakness - Dependability on partnership with other pharmeucticals and healthcare companies Threats A change in the behaviour of healthcare and pharmaceuticals could be considered a threat to the outsourcing business in healthcare. This could be due to government regulation, healthcare reform or lack of investment in healthcare. 3
4 Research Report Healthcare OPERATING MARGIN Financial Analysis As demonstrated on the operating margin graph, healthcare has continued to outperform Celesio in the last four years. In 2014, has demonstrated an operating margin of 6.63%, whilst Celesio has had one of 0.71% (declining slightly from previous years). is well positioned to continue outperforming Celesio in the future. With a current ratio of 1.70 in 2014, is in a relatively good position to pay off its short term liabilities (in terms of its assets). Over four years, Celesio has consistently shown lower current ratios, indicating once again s advantage over its main competitor. The data for gearing between both companies shows us investment has been (over four years) overall less risky for. High gearing percentages for Celesio indicate the company s high level of loans (compared to shareholder funds). Higher loans indicate higher interest rates, and if these were to rise, investment in Celsio could be considered more risky, especially compared to is more consistent gearing levels. Return on capital employed (ROCE) measures profitability based on the amount of capital used. Unlike return on equity (ROE), ROCE is crucial in considering a company s debts and liabilities. Investment is more favourable with a higher ROCE percentage. shows higher percentages of ROCE over the last four years, demonstrating a consistently higher performance than Celesio AG. CURRENT RATIO Sources: - TheShareCentre.com () - FT.markets.co.uk - Celsio annual reports (2013,2012,2011) - annual report (2014) Celesio company CELESIO % 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% CELESIO company % 3.69% 2.35% 6.63% CELESIO 1.39% 1.66% 1.90% 0.71% NET GEARING CELESIO company % 50.22% 51.80% 44.13% CELESIO 66% 71% 62% 21% RETURN ON CAPITAL EMPLOYED CELESIO company % 18.47% 10.51% 29.33% CELESIO 4.92% 9.40% 10.60% No data
5 Research Report Healthcare Currency Like a growing substantial number of healthcare companies, is based in Ireland, with the UK GDP Growth speculation that this is for tax purposes. However, the 3.00% majority of the operations take place in the United Kingdom. 2.00% Inflation The annual rate of inflation change for 2014 is 0.3%, a difference of 0.9% when compared to the statistics in years earlier of 1.2%. The small inflation change has a positive result for investors ensuring the security in the investment. Interest Rates The harmonized long term interest rates for Ireland is 1.22% (Jan 15) which is at low in recent times. More people are borrowing money due to the low interest rates meaning there is more money available for the public to borrow and use as investment. However, the UK s interest rate is currently at 0.5%. These low interest rates incentivize more people to consume goods rather than save as they will get a lower rate of return by keeping their money in the bank. 1.00% 0.00% 01/07/ /02/ /09/ /04/ % -2.00% -3.00% Economic Performance The UK economy grew by 2.6% in 2014, which was the country s fastest pace of growth since The growing economy is positive for investment in, investing in a growing market has the potential to capitalize on profit. Sources : IRELAND/Eurostat BANK of England BBC/economy 5
6 Valuation Research Report Healthcare Using the Discounted cash flow model, the forecast for s revenue growth rate suggests will continue to outperform the market in the next five years. Our assumptions rely on the previous 5 years of financial data has shown and the expanding market. Our main assumption is that the expansion of the market for outsourcing in healthcare will continue to push towards double digit growth. With a revenue growth of 23.8% over the last five years, is expected to continue growing at a similar rate. Nevertheless the probabilities are that s growth rate will slow down gradually. Variables must be taken into account such as unexpected increase in performance of competitors or reversely a decrease in competition (meaning an upside risk to predicitons) is also at risk in terms of poor integration or litigation which might alter predictions made (although unlikely). Decreasing outsourcing trends due to healthcare reform might very well be a downside risk to predictions. Although generally, our predictions are that outsourcing trends in the healthcare business will continue to secure position in the market. Source: Edison investment research, Bloomberg DCF valuation and sensitivity analysis VALUATION ( m) present value of FCFs Terminal value 1, Terminal growth rate 1.25% PV of terminal value 1, Total value 1, Net debt/(cash) (2014e) Equity value 1, Total number of shares(m) value per share( ) 3.85 upside/downside 18% source: Edison Investment Research, Bloomberg SENSITIVITY OF VALUE PER SHARE ( ) Terminal Growth rate WACC 0.25% 0.75% 1.25% 1.75% 2.25% 6.70% % % % %
7 Research Report Healthcare The main source of growth for is acquiring companies. As a result a failure to execute and properly integrate significant acquisitions will have a very negative effect on the company. Investment Risks Financial risk management Management of the financial risks facing the Group is governed by policies reviewed and approved by the Board. These policies primarily cover liquidity risk, interest rate risk, currency risk and credit risk. uses financial instruments throughout its businesses; borrowings and cash resources are used to finance the Group s operations; trade receivables and payables arise directly from operations; and swaps are used to manage the interest rate and currency risks and to achieve the desired currency profile of borrowings. Liquidity Risk Management has sufficient financing facilities available through cash flow generated from operating activities, loan notes issued, committed banking facilities and access to equity markets. This allows them to meet their short and long term funding requirements. Therefore the liquidity risk management is sufficient. Interest rate risk management is financed by a mixture of retained profits, bank borrowings and funding raised on the US private placement market. The Group s policy is to borrow in the required currencies at both fixed and floating rates of interest and use interest rate swaps to manage the Group s exposure to interest rate fluctuations. Again the company is in a good position with regards to interest rate management. Currency risk management Healthcare reporting currency and that in which its share capital is denominated is Euro. Given the nature of the Group s businesses, exposure arises in the normal course of business to other currencies, principally sterling and the US dollar. Dividend to acquire additional shares in the Company, is available in respect of the final dividend. The final date for receipt or cancellation of elections under the DRIP will be 27 January Credit risk management healthcare carries significant trade receivables and their recoverability is a material business risk. They uses a range of customer credit and collection procedures to actively manage its credit risk. s success is dependent on the management team performing to a high level. If fails to hold on to the current group of employees and if they fail to attract suitable people as the company grows, the company will suffer. has certain legal, obligatory obligations with regards to: Protecting patient information; health and safety for employees and within its centers Follows rules of procedure for selling and promoting products Failing to follow these correctly could result in loss of license, loss of reputation and risk of significant liability. Investment Decision Price Catalyst There is strong confidence in within the market: The consensus forecast amongst 6 polled investment analysts covering plc advised that the company will outperform the market (markets.ft.com) Price target Target for this stock purchase sits at 10% above the current price. If this achieved within a short time (3 months) we will look to revise this upwards. Exit Strategy If there is a decline in the stock price that goes below to stop loss set at 15% below the current price as of 16/03/2015. We see this stop loss only be hit in the event of negative consensus on the back of failure to secure companies in in acquisition deals. Source: annual report 2014 (PDF) markets.ft.com/research/markets/tearsheets/summar y?s=:lse 7
8 Research Report Healthcare Disclaimer The information and opinions in EUTIC Research were prepared or are disseminated by EUTIC. For valuation methodology and risks associated with any price targets referenced in this research report, please contact the EUTIC Fund Team at Important Disclosures EUTIC is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. EUTIC Research does not provide individually tailored investment advice. EUTIC Research has been prepared without regard to the circumstances and objectives of those who receive it. EUTIC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in EUTIC Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. EUTIC Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. With the exception of information regarding EUTIC, EUTIC Research is based on public information. EUTIC makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in EUTIC Research change. Facts and views presented in EUTIC Research have not been reviewed by, and may not reflect information known to, professionals in other EUTIC business areas. EUTIC may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. EUTIC Research may not be distributed to the public media or quoted or used by the public media without the express written consent of EUTIC. EUTIC is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. EUTIC Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. The trademarks and service marks contained in EUTIC Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. EUTIC Research or portions of it may not be reprinted, sold or redistributed without the written consent of EUTIC. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. 8
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