UDG Healthcare PLC (LON: UDG) – Delivered a Decent First Half Performance in H1 FY20

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 FY19) and Sharp (contributed 27% of the Group revenue in FY19). 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 FY19, respectively. The Group operates with around 8,700 employees (7,000 in Ashfield and 1,700 in Sharp) in around 26 countries and serves the top 30 pharmaceutical companies. The Group has a track record of more than 30 years of dividend growth.

The Company is expected to announce the third-quarter trading (Q3 FY20) update (ended 30 June 2020) on 5 August 2020.

 

(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the recent report (March 2020) from the Research and Markets, the clinical trial supplies market is projected to grow by CAGR 7.5% (from 2020 to 2027) and reach USD 3,298.91 million by 2027, which was valued at USD 1,867.44 million in 2019. The increasing R&D expenditures of Biopharma Companies and increasing clinical trials shall work as a catalyst for market growth.  Also, the Global healthcare spend is projected to reach USD 1.5 trillion by 2023, which currently valued at USD 1.2 trillion, representing 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. Also, the Specialty drugs (especially oncology and rare diseases) is 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 speciality therapies. Moreover, there is a shift in product mix from conventional primary care drugs to orphan drugs, which are more expensive and complicated.

 

(Source: Company Website)
 
Growth Prospects and Risk Assessment

The Group delivered a strong H1 FY20 performance, which was ahead of the last year. Moreover, it has a robust balance sheet with net debt to EBITDA of 0.3x, and the Group continued the robust cash flow conversion. There has been a strong demand for existing as well as newly launched products in the market. 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 the business growth rate. Moreover, the Company continued to witness a strong demand with a substantial pipeline of new business. The Company is operating as a global leader in commercialisation, contract commercial packaging and clinical trial packaging services.


 (Source: Presentation, Company Website)

As demonstrated during the first half of 2020, Ashfield continues to perform strongly, and demand for Sharp’s traditional packaging services also remained strong. The Company has been witnessing a strong demand for the existing as well as for the newly launched products in the market. Over the years, the Group has accelerated growth organically and through acquisitions.


(Source: Company Website)

However, the Company operates in a highly regulated environment, and thus, failure to meet the expectations of regulatory authorities and stakeholders can significantly impact the business performance. Moreover, the inability to capitalise on the expected synergy from the integrated acquisitions can hamper the growth prospects. Also, the profitability of the Company is dependent on outsourcing strategy of Pharmaceutical Companies.
In addition, the volatile economic and political conditions can impact the client base in many parts of the world. The uncertainties regarding Brexit or trade tensions can hamper the business development and growth plans. Due to Covid-19 mayhem, the Group can face supply chain disruption, which might incur additional costs. Also, the priorities of the Group have been shifted due to the pandemic, which has slowed down the recruitment for a clinical trial. The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations.

Segment Analysis - 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 speciality 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
 

Sharp

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.
 

(Source: Presentation, Company Website)

Divisional Analysis - Continued Robust Performance Across Both Divisions


(Source: Company Website)

In the first half of 2020, the Group delivered a strong performance in Ashfield division, due to the benefit of acquisitions made in 2019 with decent underlying growth. Ashfield generated net revenue of US$410.4 million and adjusted operating profit of US$58.6 million, an increase of 8% and 24%, respectively, against the same period of last year. While the Ashfield’s net operating margin rose to 14.3%. Further, Ashfield Communications & Advisory, which represents more than 70% of Ashfield’s operating profits, performed strongly in the first half of 2020, with the net revenue and operating profit increased by 30% and 37% (against the same period last year), respectively. In H1 FY20, the Ashfield Commercial & Clinical performance was in line with the earlier expectations.

In Sharp division, the Group delivered a robust performance during the first half of 2020, generating revenue of US$185.8 million and adjusted operating profit of US$22.7 million (growth of 12% and 25% respectively, ahead of the corresponding period of the last year. Sharp’s operating margin improved to 12.2%. The increase in Sharp division was driven by growing demand for the packaging of biotech and serialised specialty products, which was a trend in the financial year 2019 and continued in the first half of 2020. In May 2020, Sharp completed the acquisition of a packaging facility, which was made for approximately US$5 million. This acquisition will provide the incremental capacity to the U.S. commercial packaging business.

Synopsis of Recent Developments

19 May 2020: The Company acquired the pharmaceutical packaging facility from QPSI (Quality Packaging Specialists International, LLC). It will bolster the Group’s capability for meeting the continuing growth in demand for packaging and clinical services.

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.

Measuring Non-Financial Key Performance Indicators

The Company has been demonstrating continuous progress against the strategic priorities for maintaining quality, regulatory requirements and catering to environmental concerns.

 

(Source: Annual Report, Company Website)

Top Shareholders Statistics

 
 

Financial Highlights (for the six months to 31 March 2020)


(Source: Company Website)

In the first half of 2020, the revenue increased by 6% on a constant currency basis to US$693.6 million against the same period of last year, due to revenue increase in both the divisions. Excluding the impact of foreign exchange, acquisitions and disposals, the Group’s underlying net revenue rose by 4%, while total net revenue growth of 10% on a constant currency basis. Profit before tax increased to US$62.3 million in H1 FY20, more than double as reported last year. The Group delivered a growth of 16% (on a constant currency basis) in adjusted diluted earnings per share (EPS), with an increase in an underlying operating profit of 10% and decrease in tax and interest of 3% and 2%, respectively.

The Company has a robust balance sheet with a continued strong cash flow conversion performance and net debt to EBITDA of 0.3x in H1 FY20. On 31 March 2020, the Group has a unrestricted cash and cash equivalents of US$151.1 million, unused committed debt facilities of up to US$230 million from a multi-currency revolving senior bank credit facility (which will be expiring in May 2025), and bank overdraft facilities of US$5.5 million renewable on an annual basis. Also, the Group has a low gearing with net debt of US$58.2 million. The Group’s ROCE (return on capital employed) increased to 14.1% from 12.2% at 31 March 2019. As earlier announced, FY20 interim dividend suspended due to the unprecedented crisis.

Financial Ratios: Higher Profitability Margins versus Industry Median

Reported profitability metrics for the first half of the financial year 2020 stood higher than the Industry Median, reflecting higher revenue generated and better control over expenses. UDG Healthcare Plc has delivered decent return for the shareholders’ as Return on equity of 6.0% was higher as compared to the industry median of 3.6%. On the liquidity front, UDG Healthcare Plc’s current and quick ratio was higher than the industry median, which shows that the Group has sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio of the UDG Healthcare Plc’s was 0.36x, which was significantly lower as compared to the industry median, reflecting that the Company is less leveraged as compared to the industry. 

Share Price Performance Analysis


Daily Chart as on 30 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 30 July 2020, at the time of writing (before the market close, at 12:12 PM GMT+1), UDG Healthcare Plc shares were trading at GBX 708.50, down by 2.48 per cent against the previous day closing price. Stock 52 week High and Low were GBX 846.00 and GBX 423.40, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short-term support level of 100-day simple moving average prices, which reflects an upward trend in the stock. Also, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price. MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 12.66% in the last three months.

UDG Healthcare Plc Vs FTSE Mid 250 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, UDG Healthcare Plc share price has delivered 43.19% return as compared to the negative 2.60% return of FTSE Mid 250 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology

Price to Earnings Approach (NTM)

To compare UDG Healthcare Plc with peers, Price/Earnings multiple has been used. The peers are ConvaTec Group Plc (Price/NTM Earnings was 22.15), Dechra Pharmaceuticals Plc (Price/NTM Earnings was 29.38), Mediclinic International Plc (Price/NTM Earnings was 19.00) and Advanced Medical Solutions Group Plc (Price/NTM Earnings was 26.16). The Average of Price/Earnings (NTM) of the Company’s peers was 24.17x (approx.).

Business Outlook

The Group anticipates lower activity levels during the H2 FY20; however, it is implementing mitigating plans to stay resilient. Also, the Company has a substantial capital base to pursue appropriate acquisitions opportunities as it arises. Therefore, the Company is well-positioned to deliver renewed strong growth over the medium term. Also, the robust underlying performance in H1 FY20 shall be supplemented by the recent acquisition activity to emerge strongly in the future. UDG Healthcare has delivered another strong first-half performance, driven by the decent performance of both Sharp and Ashfield segments. Recently, the company has completed three acquisitions, including the acquisition of the United States strategic scientific communications agency, Canale Communications. In light of the ongoing uncertainty and near-term challenges presented by the Covid-19 outbreak, the Group withdrew the constant currency EPS guidance for FY20. The Group has more than 30 years history of paying consistent dividend; however, FY20 interim dividend currently suspended due to the uncertainty as prevailing. UDG has a strong pipeline of investment opportunities which will fetch higher returns in the long-term.


(Source: Company Website)

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

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation at the current market price of GBX 704.50 (as on 30 July 2020, before the market close at 11:55 AM GMT+1) with lower double-digit upside potential based on 24.17x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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