Investment Summary
 

1. UDG Healthcare Plc has a strong Quality and Compliance systems and processes, which provides a robust basis for its business.

2. The company focuses on its values, which define its culture and guide its interactions with its clients.

3. The strategy for the risk management process at UDG Healthcare is centrally co-ordinated and locally managed.

4. The group has a 30 year+ history of consistent dividend growth trajectory. It has a well invested asset base, which benefits in its sustainable growth.
 

Business Overview

UDG Healthcare PLC (LON: UDG) was incorporated in the year 1948 and is headquartered in Dublin, the Republic of Ireland. The company provides clinical, communication, packaging, advisory, and commercial services in the United Kingdom, North America, the Republic of Ireland, and internationally. The company has two business operations being Ashfield and Sharp. The company owns and manages (approximately) 8,700 people in 26 countries. The company is also involved in the healthcare advisory, manufacturing and technology services.

Key Statistics



Top Shareholders 
 


Business Model


(Source: Preliminary Presentation, Company Website)

The Group’s business model is a combination of its talented people, expertise, ingenuity, stakeholder partnerships and disciplined capital deployment, which enables it to deliver high-quality outsourced healthcare services and solutions.

Strategic Objectives



(Source: Preliminary Presentation, Company Website)

The company focuses on expanding its activities organically across its priority markets and supplement its organic growth by successfully acquiring and integrating complementary businesses, which strengthen its market positions. Its high quality and innovative healthcare solutions ensure its position in an increasingly competitive operating environment. The Group focuses on providing rewarding careers for its people. The Group provides the highest quality standards possible to its clients. The company believes in the execution of its strategy and its KPIs are the important drivers of improved business performance over the short, medium and long term. The Group focusses on capital allocation to maximise shareholder returns.

Revenue & Operating Profit Segment wise - FY2019


(Source: Preliminary Presentation, Company Website)

The company generates revenue and operating profit from the three segments. 37 per cent of the total revenue generated through Ashfield Commercial & Clinical, followed by Sharp. The major part of operating profit generated through Ashfield Commercial & Advisory segment.

Geographic Revenue Split and Customer concentration


(Source: Preliminary Presentation, Company Website)

The company generates major part of its total revenue from the North America region (64 per cent), followed by the UK (19 per cent). The Group has a diversified concentration of its customers.

Acquisitions in FY2019


(Source: Preliminary Presentation, Company Website)

The Group acquires Putnam Associates, Incisive Health and Canalecomm in the fiscal year 2019.

Investment Proposition


(Source: Preliminary Presentation, Company Website)

Operating Profit Growth


(Source: Preliminary Presentation, Company Website)

The Group operating profit has grown from USD 83.4 million in FY2014 to USD 158.4 million in FY2019, giving growth rate of 14 per cent on CAGR basis.

Dividend Growth


(Source: Preliminary Presentation, Company Website)

UDG v/s Index v/s Sector


(Source: Preliminary Presentation, Company Website)

UDG has witnessed 300 per cent total return from 2012 to the current period of 2020, outperforming the FTSE-250 index and its respective sector.

Recent News

On 28^th January 2020, the company appointed Ms Liz Shanahan as a non-executive director of the Company with effect from 1st February 2020.

Trading Update - Q1 FY2020

The Group reported profit before tax for the quarter to 31 December 2019 ahead of the same quarter last year. Ashfield's operating profit was ahead in Q1 FY2020 due to good underlying growth and the acquisitions. Other business segments has also performed well and in line with the expectations. The Group expected adjusted diluted earnings per share (EPS) for the year to be between 7% and 9%, ahead of last year's basis EPS on a constant currency basis.

Financial Highlights - FY2019


(Source: Preliminary Report, Company Website)

On IFRS basis, the company’s revenue decreased by 1% to $1,298.5 million as compared to the previous year data, while on a constant currency basis, it was 2% ahead. The underlying net revenue increased by 5 per cent in the financial year 2019 and total net revenue for FY19 surged by 1 per cent on a constant currency basis. The underlying adjusted operating profit for the financial year 2019 surged by 5 per cent. On a constant currency basis, the total adjusted operating profit rose by 9 per cent in FY19, reflecting continued growth in Sharp and Ashfield, while adjusted net operating margin surged from 13.1 per cent in FY18 to 14.2 per cent in FY19. The company delivered robust cash flow performance, with a free cash flow conversion rate of 83% and positive working capital inflow. The company proposed a final dividend per share of US 12.34 cents, an increase of 5 per cent against the previous year. The full-year dividend per share surged by 5 per cent to US 16.80 cents. The company acquired Canale Communications for a total consideration of $31 million, post year end in November 2019. Free cash flow conversion rate stood at 83 per cent.

Key Performing Indicators


(Source: Preliminary Presentation, Company Website)

The adjusted EPS increased to 48.44 cents in the FY2019 as compared to 45.94 cents in the FY2018.


(Source: Preliminary Presentation, Company Website)

The adjusted net operating margin increased to 14.20 per cent in the FY2019 as compared to 13.10 per cent in the FY2018.


(Source: Preliminary Presentation, Company Website)

The operating cash flow increased to USD 129.3 million in the FY2019 as compared to USD 102.50 million in the FY2018.


(Source: Preliminary Presentation, Company Website)

ROCE stood at 13.4 per cent in the FY2019 as compared to 12.7 per cent in the FY2018.

Financial Ratios

 

The reported EBITDA margin in FY19 was 14.60 per cent against the industry median of 17.10%. The reported operating margin was 6.30 per cent for the FY19. Net margin reported was 4.4 per cent for the fiscal year 2019, higher from the industry median of 3.8%. Return on equity for the same period stood at 6.40 per cent. On the liquidity front, UDG Healthcare Plc’s current ratio stood at 1.59x. On leverage front, the debt-equity ratio of the UDG Healthcare Plc’s was 0.27 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.93.

Share Price Performance


Daily Chart as on 26^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 26, 2020, at the time of writing (before the market close, at 9:10 AM GMT), UDG Healthcare Plc shares were trading at GBX 599.70, up by 1.73 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 846/GBX 423.40. The group’s stock is reflecting lower volatility as against the benchmark index, based on the company’s beta of 0.8386. The outstanding market capitalisation was around £1.46 billion.

From the technical standpoint, 14 days-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)


Currency exchange rate taken for 1 USD = 0.8407 GBP.

To compare UDG Healthcare Plc with its peers, Price/Earnings multiple has been used. The peers are Hikma Plc (NTM Price/Earnings was 13.21), Convatec Plc (NTM Price/Earnings was 17.23), Dechra Plc  (NTM Price/Earnings was 22.49), Spire Plc (NTM Price/Earnings was 10.84), Indivior Plc (NTM Price/Earnings was 16.92) and Medica Group Plc (NTM Price/Earnings was 12.50). The average of Price/Earnings (NTM) of the company’s peers was 15.53x (approx.)

Method 2: Price to Cash Flow Approach (NTM)


Currency exchange rate taken for 1 USD = 0.8407 GBP.

To compare UDG Healthcare Plc with its peers, Price/Cash Flow multiple has been used. The peers are Hikma Plc (NTM Price/Cash Flow was 12.06), Convatec Plc (NTM Price/Cash Flow was 16.27), Dechra Plc  (NTM Price/Cash Flow was 26.95), Spire Plc (NTM Price/Cash Flow was 4.23), Clinigen Plc (NTM Price/Cash Flow was 9.92) and Medica Group Plc (NTM Price/Cash Flow was 12.50). The Average of Price/Cash Flow (NTM) of the company’s peers was 13.21x (approx.)

UDG Healthcare V/S FTSE-250 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, UDG Healthcare Plc share price has increased 5.17 per cent as compared to 31.80 per cent decline of FTSE-250 index, which shows that the stock has outperformed the index during the last six months.

Dividend Yield 
 

(Source: Thomson Reuters)

UDG Healthcare Plc has a dividend yield of 2.2 per cent.

UDG Healthcare Total return- 1 year
 

(Source: Thomson Reuters)

In the last one year, UDG Healthcare Plc has delivered a total return of 5.51 per cent while the FTSE All share index has delivered a total return of negative 17.43 per cent.

Growth and Risk Assessments

A failure to execute and properly integrate acquisitions may impact the Group’s projected revenue growth. An inability to predict client and market trends could affect the market leading position of the Group. Any change to pharma company outsourcing strategy could affect the business and growth of the company. Brexit uncertainty could hamper the operations of the Group. The global macroeconomic, political and regulatory risks could affect the business performance of the UDG Healthcare. The Group is exposed to liquidity, interest rate and credit risks. Any failure in cybersecurity could affect the operations as well as the reputation of the Group. However, the positive market dynamics and growing FDA approvals would benefit the Group. The company has a global presence and strong market position which could enhance its business growth rate. The Group focuses on its strategic investments to support its sustainable growth.

Conclusion

UDG Healthcare has delivered another strong year with strategic growth. On a constant currency basis, the company delivered excellent financial growth with an adjusted earnings per share accelerated by 7 per cent. The two global platforms, Sharp and Ashfield, delivered a robust performance through a combination of the benefit of acquisitions and underlying growth. Recently, the company has completed three acquisitions to date in 2019 for a total consideration of approximately $137 million, including the acquisition of the United States strategic scientific communications agency Canale Communications, which the group has announced on 26th November 2019. All three recent acquisitions were in line with the strategy to expand into higher growth and higher-margin areas, complementary to the current service offering.

Based on decent fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 569.50 (as on 26th March 2020, before the market close at 8:00 AM GMT) with lower double-digit upside potential based on 15.53x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 13.21x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.). 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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