As reinventions go, UDG Healthcare’s has been more or less complete. Having started life in Ireland in 1948 as United Drug, a distributor of medicines from manufacturers to retailers, three years ago it was a case of “all change”. Out went the low-margin drugs supply business; in came a new model, with UDG becoming a provider of services to the pharmaceuticals industry, ranging from writing marketing literature on new drug launches to packaging the products ready for shops.
Listed since 1989 and now a constituent of the FTSE 250, UDG Healthcare operates in 26 countries and employs more than 8,000 staff. It divides itself into two businesses: Ashfield, which accounts for about 70 per cent of the group, works with drugs companies at every stage of the new product process, including advising, pricing, marketing and communications; Sharp, comprising about 30 per of the group but growing, provides packaging and support for newly launched treatments.
There have been plenty of acquisitions and a few disposals along the way. Indeed, UDG has spent $750 million on 19 deals in the past six years, reinvesting much of the proceeds in the group’s growth.
In headline terms, yesterday’s full-year results were strong. Group revenues rose by 8 per cent to more than $1.3 billion and though statutory pre-tax profits came in at only $8.4 million, strip away the effect of acquisition costs and charges on disposals and the adjusted number was $138.8 million, a 17 per cent increase on the previous year. The company doesn’t give detailed guidance about its anticipated profits over the coming year until January, but it said yesterday that it was expecting that over the medium term Sharp would increase its operating profits by about 10 per cent and Ashfield by between 5 per cent and 10 per cent.
Go a little deeper and the picture is more mixed. Revenues from Ashfield’s increasingly important communications and advisory work rose healthily to $323.9 million, but earnings from its commercial and clinical work — which includes its reps — fell by an underlying 7 per cent to $597.5 million. This is down to a move among big pharma to prioritise specialist treatments rather than traditional blockbusters, leading them to need smaller, more expert sales teams. UDG Healthcare said that it expected the trend to continue in the coming year, after which it is thought likely to tail away.
At Sharp, while the dominant American operation showed strong growth, revenues from Europe fell by an underlying 17 per cent to $43.4 million and the region generated a small operating loss for the year.
With growth in profits next year also expected to be dragged back by investment costs, it was enough to push the shares almost 4 per cent lower to end down 24½p at 596p.
These feel like minor hiccups for UDG Healthcare, which since its reinvention looks well placed to generate a steadily increasing set of high-quality earnings from the comprehensive services it offers to the pharmaceuticals sector. The United States, China and Japan all offer strong growth potential.
The shares have been clobbered this year, down almost 40 per cent since their peak in May, which seems harsh. They have risen since the beginning of 2015 by a more impressive 44 per cent. They also change hands for about 15 times forecast earnings for a prospective yield of a little more than 2 per cent.
Growth is likely to be steady rather than stellar, but the shares are worth owning over the long run.
ADVICE Hold long term
WHY There may be some short term turbulence ahead but the potential looks good
Renew Holdings
Renew Holdings is an Aim-listed company that does what its name implies and more. Think of every aspect of the country’s infrastructure network, from railways to nuclear power to wind farms to flood defences, and, with the exception of roads, Renew is almost certainly working on it in some capacity.
It maintains and repairs bridges and viaducts for Network Rail, services tunnels for the London Underground and provides support for decontamination and waste management at the Sellafield nuclear reprocessing and decommissioning site in Cumbria. It performs services for four water utilities in England and Wales and maintains the tunnels that help some of the biggest hydropower plants in Scotland to produce electricity. Slightly bizarrely, it also has a tiny specialist building unit whose customers include super-wealthy property owners wanting to put Olympic-size swimming pools in the basements of their central London mansions.
All of which should mean that it is in a princely position to profit from the government’s £600 billion infrastructure building and overhaul drive over the next decade and its promised increase in spending on shoring up Britain’s flood defences. With the regulated water and rail sectors poised to secure agreement on their profit and investment plans for the next five years, it also should be in a strong position to give investors good guidance about the likely level of medium-term earnings.
Renew’s annual results for the year to the end of September were complicated by losses taken against the Forefront gas infrastructure business sold earlier in the year for £1, which depressed statutory pre-tax profits by 25.8 per cent to £14.7 million. Underlying performance was impressive, though, with margins improving, adjusted operating profits from engineering services rising by 19.3 per cent to £32.5 million and the order book up 16.4 per cent to £510 million. The dividend was lifted by 11.1 per cent to 10p. The shares, down 14p at 361p yesterday, are volatile, regularly buffeted by falls at other contractors. They trade at a paltry 10.6 times earnings for a yield of 2.7 per cent and must be a “buy”.
ADVICE Buy
WHY New infrastructure may boost low-rated engineer
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