UDG Healthcare PLC (LON: UDG) – Sound business model with a sustainable business growth rate trajectory

UDG Healthcare is a FTSE-250 listed UK based company, which is engaged in the business of healthcare advisory, communications, commercial, clinical and packaging services. The Company operates under two divisions, namely Ashfield and Sharp. Ashfield division is into healthcare advisory, communications, commercial and clinical services. Ashfield constitutes a significant portion of the Company’s business. Sharp division is into contract clinical, manufacturing, packaging and technology services. UDG Healthcare disposed of the United Drug Supply Chain businesses in April 2016, and since then it has acquired multiple companies which includes Canalecom, Macungie site, Incisive Health and many more. The Company employs around 9,000 people, and it has operations in 29 countries.

 (Source: Company website)

Acquisitions Completed by UDG Healthcare

(Source: Company website)

Growth Prospects and Risk Assessment

UDG Healthcare has a significant global presence and has a market-leading position diversified by geography and services. The Company has a strong balance sheet position to support acquisition for synergies and inorganic growth.

Some of the critical strategies of the Company include value generation through acquisitions, development and delivery of innovative solutions, client diversification and client outsourcing strategy. The acquisitive growth remains a crucial element for the growth of the Company as it helps in achieving operational and financial synergies. The Company also generates growth via outsourcing from pharma companies.

The key growth drivers of the Ashfield business segment include increasing outsourcing penetration, positive FDA approval outlook, growth in drugs and rare diseases, and launch of speciality products. The catalysts for the development of Sharp division would be increasing demand for secondary packaging of injectable products and requirement to access technology solutions and capabilities.

The underlying demand, operational improvements, and value creation through acquisition have underpinned the growth of the Company, which led to 26% year on year growth in the first half of the financial year 2020. The return on capital employed has also improved from 12.2% at the end of H1 FY19 to 14.1% in H1 FY20, which was supported by the improved adjusted operating profit. Thus, the critical fundamentals for medium-term growth are intact.

However, a failure to properly integrate the acquired business into the existing business can impact the revenue growth of the Company, and the synergy would not be adequately captured. The lack of delivery of innovative solutions to clients may lead to cancellation of future business. If the client base of the Company becomes too concentrated, the Company would be more susceptible to competition. The Company provides service to the healthcare market, and any inappropriate advice and packaging supply can lead to a negative patient experience.

Industry Outlook Dynamics

The market dynamics of the healthcare industry remains positive. The global pharmaceutical market is growing, and there is an increase in R&D spends. The market of speciality medicines is growing, and the growth of speciality drugs has resulted in increased demand for multi-channel and digital communications. The need for data, increasing drug approvals, migration to direct patient engagement, growth in orphan drug and rare disease and the increasing importance of patient adherence are the new trends. The growing compliance for tracking and tracing required for prescription drugs has led to the growth of digital solutions that are helping in combating counterfeit drugs. The demand for secondary packaging of injectables and end-to-end integrated services is also in trend. Healthcare companies are outsourcing to global partners.

The market size of the commercial & clinical business is around USD 6 billion, and it is expected to grow at a CAGR of about 5% in medium-term. The communication and advisory business have a market size of USD 10 billion. The commercial packaging is expected to have a market size of USD 6 billion, and the clinical services are expected to have a market size of USD 7 billion.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of UDG Healthcare Plc.

Recent Developments

On 1 October 2020, the Company announced the appointment of Ms Anne Whitaker as a Non-Executive Director of UDG Healthcare Group with immediate effect.

On 5 August 2020, the Company announced the appointment of Shane Cooke as the Chairperson of UDG Healthcare Plc.

A Glimpse of Business Segments (H1 FY20)

In the first half of 2020, the Company delivered a strong performance in Ashfield division, due to the benefit of acquisitions made in 2019 with decent underlying growth. 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 were in line with the earlier expectations. In Sharp division, the Company 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. 

Q3 FY20 Trading Update (for the period from 1 April 2020 to 30 June 2020, as on 5 August 2020)

• The Company stated that the business remained well-positioned with excellent long-term market fundamentals.
• After a strong first-half performance, the revenue for Q3 FY20 was down due to weaker demand for products during the lockdown. On a constant currency basis, the profit before tax for the quarter was below the corresponding period of the last year.
• The third-quarter performance was down due to a fall in profits for Ashfield, which offset the improvement seen in Sharp division.
• In Sharp division, the operating profit was significantly ahead of the same quarter last year, with continued strong demand, and operational improvements.
• Sharp also completed a US$37.5 million investment for a 25% shareholding in Berkshire Sterile Manufacturing Inc.
• The Company witnessed a strong financial position, with a robust balance sheet and liquidity position.
• The Board has paid an interim dividend per share of 4.46 US cent, which was in line with the 2019 interim dividend. It also has an intention to pay a final dividend for the full year to 30 September 2020.

Financial Highlights (for the six months to 31 March 2020 (H1 FY20), as on 19 May 2020)

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 5 November 2020, at the time of writing (before the market close, at 10:00 AM GMT), UDG Healthcare Plc shares were trading at GBX 767.00, down by 0.96% against the previous day closing price. Stock 52-week High was GBX 846.00 and Low of GBX 423.40, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20-day, 50-day, 100-day and 120-day simple moving average price, which reflects a bullish signal for the stock. The Company’s stock has delivered a positive return of around 21.54% in the last six months.

Based on 1-year performance, UDG has outperformed the FTSE All-Share Healthcare Equipment & Services Index and FTSE-250 Index. UDG generated a return of around 0.6%, whereas FTSE All-Share Healthcare Equipment & Services Index return was about -19.9% and FTSE-250 Index return was close to -11.8%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company reported its financial performance for nine months ended on 30 June 2020, and the profit before tax was ahead of last year. The acquisitions have continuously supported the growth of the Company even in tough times. The long-term fundamentals of the Company are in line with UDG Healthcare’s business. It has a strong market position given the nature of its business and diversification of client base and geographies. In August 2020, the Company reinstated the financial guidance for FY2020 and expected the earnings per share to be between 43 USD cents and 45 USD cents.

The Company would focus on increasing collaboration between agencies, and it will expand into aligned adjacencies to core scientific communication capabilities. Data and analytics expertise already support the business. The merger & acquisition will remain a key priority of the Company that will improve the ability of the Company with a ROCE of more than 15% within three years.

In the medium-term, UDG Healthcare targets an underlying operating profit growth between 5% to 10% for the Ashfield business division and underlying operating profit growth of around 10% for Sharp business segment. The inorganic growth through mergers & acquisitions would supplement the overall development. Given the strong-diversified business, robust financial position and encouraging market fundamentals, the Company is well-positioned to sustain the near term covid-19 challenge.

(Source: Company website) 

Considering the decent performance in Q3 FY20, robust balance sheet position and liquidity profile, and support from the valuation as done using the above method, we have given a “BUY” recommendation on UDG Healthcare Plc at the current price of GBX 767.00 (as on 5 November 2020, before the market close at 10:00 AM GMT), with high single-digit upside potential based on 24.19x 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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