UDG Healthcare PLC (LON: UDG) – Strategic acquisitions complementing the underlying profit growth.

UDG Healthcare PLC (LON: UDG) is an 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.  Moreover, UDG operates under two business divisions – Ashfield and Sharp. Furthermore, Ashfield operates across three business areas - Ashfield Advisory, Ashfield Engage and Ashfield Health. Sharp is one of the prominent players in commercial contract packaging.

On 18 May 2021, UDG will announce the interim results for the six months ended 31 March 2021.

(Source: Company Presentation)

The Company had completed 24 acquisitions and five disposals since 2012.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

UDG has a strong financial and balance sheet position, which can be depicted from its intention to raise the FY20 final dividend. 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 UDG’s long-term growth trajectory. Nevertheless, the Company had an enriched history of achieving various operational and financial synergies by making lucrative acquisitions.

  (Source: Company Presentation)

The outsourcing from various pharma companies remained a key determinant of growth. Moreover, UDG provides outsourced services to approximately 300 healthcare companies.

However, there are certain potential risks that can impact the business, such as credit risk, liquidity, interest rate fluctuation, failure to meet stringent regulatory requirement and Covid-19 related risk. Moreover, UDG had a risk of failure to capitalize on potential synergies from the recent acquisitions, which may hamper the growth prospects.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global pharmaceuticals packaging industry is expected to grow at a CAGR of 8.5% and reach USD 188.79 billion by 2027. Moreover, emerging countries such as Brazil, China, and India would be the key geographical regions to drive growth. Meanwhile, several factors like growing health infrastructure, rising accessibility of medicines, and drug discovery would fuel the pharmaceuticals packaging industry’s demand.

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

Recent Developments

On 28 January 2021: The Company announced that Linda Wilding, Shane Cooke, and Lisa Ricciardi have stepped down from the Board.

A Glimpse of Business Segments

(Source: Company Website)

Q1 FY21 Trading Update (covering the period from 1 October to 31 December 2020, as on 26 January 2021)

• The Company delivered a positive Q1 trading performance, with a good start to the financial year.
• On a constant currency basis, the adjusted operating profit for Q1 FY21 increased from the corresponding period of the last year.
• The Company saw the Ashfield service offering's significant evolution, with the launch of revised brand architecture. This evolution will increase collaboration and also create a more integrated service offering to clients.
• UDG stated that Ashfield Commercial & Clinical would be called Ashfield Engage, while Ashfield Communications & Advisory has been rebranded as Ashfield Advisory & Health.
• In Ashfield, the quarter adjusted operating profit was ahead of the same quarter last year.
• Ashfield Advisory & Health has performed well with an increase in adjusted operating profit (against the same quarter last year).
• Moreover, Ashfield Engage was traded in line with anticipation, with a slight decrease in adjusted operating profit (against the same quarter last year).
• In STEM and Ashfield Engage, the activity levels have shown good sequential improvement against the second half of FY20.
• In January 2021, Ashfield had completed the acquisition with PHMR Limited for a total consideration of up to £32 million.
• The Company delivered a strong performance in Sharp, with an increase in adjusted operating profit (against the same quarter last year) and continued strong demand from biotech companies.
• For FY21, on a constant currency basis, the Company expects growth of 11%-13% in adjusted operating profit and 9%-11% in adjusted diluted earnings per share.

Financial and Operational Highlights (for the year ended 30 September 2020 (FY20), as on 24 November 2020)

(Source: Company Website)

• The Company delivered a strong FY20 performance, with adjusted EPS growth of 1% YoY (due to strong performance in the Sharp division and acquisitions).
• Despite the pandemic's challenging economic backdrop, the net revenue increased 5% YoY and adjusted operating profit increased 7% YoY.
• The Company delivered a three-year average TSR (Total Shareholder Return) of 25.7% in 2020 as compared with 33.6% in 2019.
• The Group’s cash flows increased to USD 230.7 million in 2020 from 2019, driven by higher profit and a decrease in working capital.
• The Group’s ROCE increased from 13.1% in 2019 to 13.5% in 2020.
• The net debt to annualized EBITDA stood at 0.1x, and the Company had net debt of USD 16.2 million as of 30 September 2020.
• The Company had USD 246 million of fully committed undrawn debt facilities as of 30 September 2020.
• The Board had declared an increase of 1.6% with respect to the 2020 final dividend of 12.54 cents per share, driven by the strong balance sheet.
• Since 2012, the Company had completed 24 acquisition and 5 disposals, reflecting good underlying growth for the future.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 25 February 2021, at the time of writing (before the market close, at 8:00 AM GMT), UDG Healthcare Plc shares were trading at GBX 757.00, down by 1.24% against the previous day closing price. Stock 52-week High was GBX 849.50 and Low of GBX 423.40, respectively.

From the technical standpoint, 200-day SMA (748.20), 200-day EMA (756.8) and 14-day RSI (23.97) are indicating an upside potential in the stock. The Company’s stock has delivered a positive return of around 7.33% 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. It had generated a return of around 6.07%, whereas FTSE All-Share Healthcare Equipment & Services Index return was about -21.09%, and FTSE-250 Index return was close to 2.92%.

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

Business Outlook Scenario

UDG had illustrated adjusted operating profit growth at constant currency during Q1 FY21 as compared to an equivalent period of the prior year. UDG had projected its adjusted operating profit to show growth between 11% and 13% at a constant currency during FY21 as compared to FY20. Similarly, the constant currency adjusted diluted earnings per share were anticipated to witness a growth ranging from 9% to 11% during FY21 as compared to FY20. Ashfield had completed the acquisition of PHMR Limited for a total consideration of up to £32.0 million in January 2021.

UDG’s Sharp segment had carried the positive momentum in FY21 as its adjusted operating profit remained ahead during Q1 FY21 than the similar period of FY20, driven by rising demand for packaging services across Clinical and Commercial businesses. Overall, UDG would continue to look for significant opportunities for strategic acquisitions to achieve underlying profit growth.

(Source: Company Presentation)

Considering the positive Q1 trading performance, strong value share gains, structural improvements in the cost base, decent cash flow performance, robust balance sheet position, sound business model, consistent dividend payments from the last 30 years, 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 757.00 (as on 25 February 2021, before the market close at 8:00 AM GMT), with lower-double digit upside potential based on 24.14x Price/NTM Earnings (approx.) on FY21E 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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