UDG Healthcare
The death of the pharmaceuticals sales rep has long been forecast, but UDG continues to defy the doom-mongers. The healthcare services group celebrates its 70th anniversary this year and, it seems, adaptability is the key to its longevity.
UDG Healthcare completed six acquisitions last year worth $270 million, five of which were in its Ashfield business, its largest. Ashfield includes its sales reps, but it has been adding bolt-on acquisitions of higher-margin services to pharma companies, such as communications and advisory work. The four deals completed during the second half of its 2017 financial year, including Cambridge Bio Marketing and Micro Mass Communications, have been bedding in as expected, UDG said yesterday in its first-quarter trading update for the three months to the end of December.
However, in the words of Brendan McAtamney, chief executive, the group has been “pruning the tree” as it grows. While UDG has completed 18 acquisitions since 2012 worth about $700 million, it has sold businesses worth roughly $600 million, including United Drug. It also has sought to diversify geographically, delivering services across more than 50 countries, though its large operation in the United States generates just over half of group revenue. It opened a packaging facility in Pennsylvania last April.
Acquisitions and underlying growth have helped Ashfield, which accounts for about two thirds of group revenue, to deliver operating profit “significantly” ahead in the first quarter compared with the same period last year.
Operating profit at Sharp, which provides packaging to pharma companies, was behind the same period last year, with “unusually high churn” in the United States in the second half of its 2017 financial year continuing into the first quarter of the new one. The disruption has been blamed on what Mr McAtamney called the “normal rough and tumble” of issues such as label changes and regulatory delays at its customers. Hurricane damage in Puerto Rico in September disrupted manufacturing schedules at drugs companies, while the potential benefits from America’s plans to tighten up on the labelling of pharmaceuticals to restrict the black market have been delayed.
The acquisitions at Ashfield helped to offset the dip at Sharp and meant that UDG’s first-quarter pre-tax profit was “well ahead” of last year. Moreover, the issues at Sharp are expected to ease throughout the year and its trading is expected to pick up in the second half. UDG is forecasting that the group’s underlying profit growth will be weighted to its second half.
Tax changes in the US have already supported UDG. The group’s tax rate is expected to be 4 per cent lower, at about 19 per cent. Accounting for these taxes and its performance in the first quarter, UDG is forecasting adjusted earnings per share on a constancy currency basis to rise by between 18 per cent and 21 per cent.
The shares have performed strongly, rallying by 50 per cent between the end of January 2017 and November’s record high, but have cooled in recent months. They eased back 18p to 794p yesterday and remain 17 per cent off November’s peak.
The FTSE 250 company still commands a premium to the wider pharma services sector, Numis points out, thanks to M&A boosting its earnings per share. And there may be more to come: UDG’s balance sheet leaves it in position to launch further acquisitions, with Jefferies forecasting capacity of about $400 million.
ADVICE Buy
WHY Shares have dipped from recent highs and UDG has the firepower for more bolt-on deals
Greencore
It has been a busy few years for Greencore. The world’s largest maker of sandwiches has been on a buying and expansion spree, building up its business in the United States last year with the acquisition of Peacock Foods, while spending millions more on developing its British production sites.
All this has not come cheap and debt taken on to fund the growth has lifted the company’s gearing ratio to 2.5 times earnings before interest, tax, depreciation and amortisation. However, with the spending phase over and consolidation the order of the day, Greencore projects the ratio to fall to two times by the end of this year.
A first-quarter trading update yesterday showed group revenues of £641 million, a rise of 53.6 per cent on a reported basis, with the convenience food division delivering revenue growth of 9.2 per cent to £385 million. In the US, revenues in the business rose 297 per cent to £255 million, largely on the back of the Peacock deal.
Speaking of America, the Trump administration’s recent tax cuts will be a further boost to Greencore’s business stateside, with the company expecting a one-off gain of $28 million as well as lowering in its steady state tax charge.
All this should translate into a higher level of free cashflow in future as the fruits of recent investment begin to pay off. City analysts are estimating a full-year yield of more than 4 per cent for this year.
Greencore looks not only like a decent income stock, but also a good defensive play. Both the American and British operations are relatively self-contained. In the UK, only about a fifth of the supply chain is non-domestic, meaning that the impact of Brexit should be relatively limited.
With M&A and large-scale investment almost certainly off the cards for the time being, Greencore is a business that will be able to dedicate itself to generating a good return for its investors for the foreseeable future. At the share’s present valuation, the stock looks relatively cheap and now could be as good a time to make an entry, given the fall of more than 10 per cent in the price in the past month.
ADVICE Buy
WHYShares look cheap and could be a good income play
