Investment Highlights
 

1. UDG Healthcare PLC (LON: UDG) has its operations in 26 countries and is working closely with top 30 Pharma companies.

2. The company’s operations are divided into two divisions Sharp and Ashfield, both have decent growth potential and offer world-class products and services.

3. The group has decent operational performance with strong control over its expenses for the period.

4. The group has provided acquisitive growth with expansion into new geographies, which should improve margins through cost synergies in future.

5. Increasing penetration towards outsourcing, rising drug development cost, demand of specialty drugs will create ample opportunities for UDG.

6. UDG Healthcare is primarily focused on delivering quality products with long term partnerships and solving issues with innovation and creativity.

7. The group deliver enhanced and excellent client experience through strong financial and business leadership and have built a wealth of skills and knowledge over many years.

8. The company supplement its organic growth by acquiring complementary businesses and integrating them to strengthen market positions.

9. The products and services offered by the company are used by individuals of all age groups ranging from Infants and Children to Older Adults.

10. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

UDG Healthcare PLC (LON: UDG): Leading Player in Health Care Advisory with Strong Balance Sheet & Liquidity Profile

UDG Healthcare PLC (LON: UDG) is a FTSE 250 listed healthcare service provider. It was established in 1948 and is headquartered in Dublin, the Republic of Ireland. It provides services related to the advisory, commercial, communication, clinical, technology and packaging services. The Company is operating through two business segments – Ashfield (represented 73% of the Group revenue in 2019) and Sharp (described 27% of the Group revenue in 2019). Geographically, the group splits the revenue into three major segments – North America, United Kingdom and Rest of World, which contributed 64 per cent, 19 per cent and 17 per cent of the group revenue in 2019, respectively. The group operates with around 8,700 employees (7,000 in Ashfield and 1,700 in Sharp) in 26 countries and serves the top 30 pharmaceutical companies. The group has a track record of more than 30 years of dividend growth.

Next Financial Calendar Event: The UDG group is expected to announce its half-yearly 2020 results on 19 May 2020.


(Source: Company Website)

Key Statistics



Key Performing Indicators with respect to Strategic Pillars
 

Development as Market Leader

1. In the financial year 2019, UDG had completed the acquisitions of Incisive Health and Putnam, which bolstered its capability in Communications and Advisory vertical of Ashfield division.

2. ‘AA’ ratings to UDG was assigned by MSCI ESG rating assessment.
 

Transformation through People

1. Defining career pathways for employees with an enhanced focus towards succession planning.

2. UDG’s value-based leadership programme was done by 98% leaders.
 

Relentless Improvement

1. The STEM aXcellerate programme was introduced to improve the performance with clients.

2. Net margin stood at 14.2% in FY2019, while EPS was enhanced by 5% from 45.94c in FY2018 to 48.44c in FY2019.
 

(Source: Company Website)

Critical Developments to Tackle Covid-19 and Environmental Issues

7 April 2020: UDG Healthcare had announced that they are supporting with the clinical trial, labelling and distribution services for the development of potential vaccine of Covid-19.

28 January 2020: Liz Shanahan joined the UDG group as non-executive director from 1 February 2020.

24 January 2020: UDG received a ‘B’ grade on the scale of A to D, while the global average is C by the Carbon Disclosure Project which proves that UDG has been operating in a responsible manner environmentally.

Top Shareholders

 

Global Healthcare Market Trends

The Global healthcare spending is projected to reach USD 1.5 trillion by 2023, which is currently valued at USD 1.2 trillion, representing a compounded annual growth rate (CAGR) of 3 to 6 per cent. This upward trend is primarily driven by the incremental rate of ageing population and life expectancy. By 2050, there will be around 2 Billion people above 60 years of age, while life expectancy is forecasted to increase by 4 years by 2040. While the Specialty drugs (mainly oncology and rare diseases) are expected to represent two-third of all product launches over the next 5 years. The above-mentioned global trends are occurring at a time when the cost of developing a drug is rising, and the market (comprising both biotech and pharmaceutical firms) is moving towards specialty therapies. Moreover, there is a shift in product mix from conventional primary care drugs to orphan drugs, which are more expensive and complicated. Furthermore, as per market analysts, the clinical trial supplies market is projected to grow by CAGR 7% (from 2020 to 2027) and reach USD 3,298.91 million by 2027, which was valued at USD 1,867.44 million in 2019. 
 

Trading Update – Robust H1 FY2020 Performance
 

1. On 15^th April 2020, UDG Healthcare released an update on the trading performance for the first half of the financial year 2020 ending 31^st March 2020 and the impact of Covid-19 on business performance.

2. The group is focused on ensuring the health and safety of its employees and customers.

3. The group witnessed a strong first-half performance in the financial year 2020 and expected a decline in the performance in the second half of the financial year due to Covid-19 outbreak.

4. The company has implemented a mitigation plan and has withdrawn its guidance for the full-year 2020 due to an uncertain situation.

5. The group has a robust balance sheet with adequate liquidity for the period. The company has decided to suspend its dividend payments until the situation gets normal.
 

 Financial Highlights – Significant Progress in FY2019 (30^th September 2019)

(Source: Annual Report, Company Website)
 

1. 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.

2. 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.

3. The company delivered robust cash flow performance, with a free cash flow conversion rate of 83% and positive working capital inflow.

4. 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.

5. The company acquired Canale Communications for a total consideration of $31 million, post-year-end in November 2019.
 

 
Financial Ratios - Higher Profitability Margins versus FY2018 data

 

The reported EBITDA margin, Operating Margin, Pretax margin and Net margin reported was 14.6 per cent, 6.3 per cent, 5.7 per cent and 4.4 per cent, respectively, for the financial year 2019 and stood higher as compared to FY2018 data. Return on equity for the Financial year 2019 stood at 6.4 per cent, which was higher than ROE for FY2018. On the liquidity front, UDG Healthcare Plc’s current ratio was higher than the industry median of 1.09x. On leverage front, the debt-equity ratio of the UDG Healthcare Plc’s was 0.27x, which was lower as compared to the industry median of 0.94x.

Share Price Performance


Daily Chart as on 23rd April 2020, before the market close (Source: Thomson Reuters)

On April 23, 2020, at the time of writing (before the market close, at 11:20 AM GMT), UDG Healthcare Plc shares were trading at GBX 617.00, up by 2.15 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 846.00/GBX 423.40.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



 
To compare UDG Healthcare Plc with its peers, Price/Earnings multiple has been used. The peers are Indivior Plc (NTM Price/Earnings was 39.22), ConvaTec Group Plc(NTM Price/Earnings was 19.41), Uniphar Group Plc(NTM Price/Earnings was 10.05), Clinigen Group Plc (NTM Price/Earnings was 9.76) and Mediclinic International Plc (NTM Price/Earnings was 9.36). The Average of Price/Earnings (NTM) of the company’s peers was 17.56x (approx.)
 
Method 2: Price/Cash Flow (NTM) Approach

Currency exchange rate taken for 1 USD = 0.80969 GBP.

To compare UDG Healthcare Plc with its peers, Price/Cash Flow multiple has been used. The peers are Advanced Medical Solutions Group Plc (NTM Price/Cash Flow was 21.36), Clinigen Group Plc (NTM Price/Cash Flow was 15.42), Medica Group Plc (NTM Price/Cash Flow was 13.22), DCC Plc (NTM Price/Cash Flow was 10.65) and Mediclinic International Plc (NTM Price/Cash Flow was 5.44). The Average of Price/Cash Flow (NTM) of the company’s peers was 13.20x (approx.)

Valuation Metrics


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

UDG Healthcare V/S FTSE-250 Index - 1 Year


(Source: Thomson Reuters)

In the last year, UDG Healthcare Plc share price has delivered negative 1.29 per cent returns as compared to negative 21.21 per cent returns of FTSE-250 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Thomson Reuters)

UDG Healthcare Plc has generated a total return of 24.07 per cent in the last five years versus the total return of FTSE All share of 1.05 per cent for five years period.
 
Divisional Specific Growth Drivers to Tap Market Opportunities

Ashfield
 

Advisory

1. Growing demand for improved decision making through data and research as the market is moving towards specialty drugs.

2. Increasing penetration in outsourcing space.

3. Estimated market size: USD 2.9 billion.
 

Communications

1. Increased number of drug approval outlook and direct patient engagement.

2. Estimated market size: USD 7.3 billion.
 

Commercial & Clinical

1. Increasing patient support programmes.

2. Estimated market size: USD 6.1 billion
 

Sharpe

Commercial

1. Increasing penetration towards outsourcing and demand for specialty providers.

2. Estimated market size: USD 5 to 7 billion.
 

Clinical

1. Increasing demand for integrated service offerings and specialty clinical services for rare disease and orphan patients.

2. Estimated market size: USD 6 to 8 billion.
 

Growth Prospects and Risk Assessment

There has been a strong demand for its existing as well as newly launched products in the market. The company, through its wide-ranging scope, had accelerated growth organically and through acquisitions. 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. 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. The global macroeconomic, political, and regulatory risks could affect the business performance of 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.

Business Outlook Scenario

The company has shown an increase in financial performance in the financial year 2019. The bottom-line performance has improved, with improved profitability margins for the period. The group has a strong pipeline of opportunity from its producing assets and is making an investment in those assets to fetch higher returns in the long-term. The company has divided its operations into two divisions Ashfield and Sharp, and both delivered decent performance based on underlying growth and ongoing acquisitions. In 2019, the company completed acquisitions for a total consideration of approximately $137 million. The acquisition activities undertaken by the company stood in line with the strategic policy and are focused to deliver higher growth to support current service offerings.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 1,083.4 million in FY16 to USD 1,298.5 million in FY19. Compounded annual growth rate (CAGR) stood at 6.22 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 604 (as on 22^nd April 2020), with lower-double digit upside potential based on 17.56x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 13.20x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
* The “BUY” recommendation in the report is also valid for the current price as on 23^rd April 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.