United Drug (IR: UDG or LSE: UDG), rated a BUY by Jefferies
The healthcare sector is farming out non-core activities to outsourcers, such as dual-quoted United Drug, Ireland's largest pharmaceutical wholesaler. It provides specialist packaging, sales, medical and regulatory services.
In February's trading update, it announced a €30m, four-year deal with a "leading pharmaceutical" customer. So it expects diluted earnings per share (EPS -adjusted for outstanding share options) for the 12 months to September to be 4%-8% ahead of last year. That's a very credible performance, given its domestic market is down 3% due to regulatory changes.
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In 2005, 62% of the group's profits came from Ireland. Now this has halved and is set to drop further as the centre of gravity tilts towards faster-growing regions such as America, Britain and Europe. The board is adding extra lines so it can offer a range of complementary solutions that can be cross-sold into the same client base. The customer benefits from lower costs and an improved service and in return United picks up more volume and creates wider barriers to entry for rivals.
But that's not all. With many prescription medicines coming off-patent, drug companies are being forced to turn to United as they jettison their in-house sales teams. They still need to sell their wares to hospitals and GP surgeries, but don't need full-time employees. Instead, they're choosing channel partners who have the critical mass and regulatory skills to promote their tablets, potions and creams across the industry.
Analysts forecast 2012 sales and underlying EPS of €1.7bn and 23.4 cents respectively, rising to €1.8bn and 25.1 cents in 2013. On this basis, I value the stock on a ten times EBITA multiple. After adjusting for net debt of €121.5m, that generates an intrinsic worth of €2.85 per share (or 234p).
Investors need to watch for foreign-exchange risks and customer mergers and acquisitions activity, all of which could knock prices and volumes. There is also a threat of new entrants either logistics companies using their existing infrastructure, or customers wishing to distribute medicines themselves.
Investment bank Jefferies has a target price of 266p (or €3.20), and interims are due out on 9 May.
Rating: BUY at €2.30/190p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.
Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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