Stocks’ Details

Sonic Healthcare Limited

A Look at Trading Results: Sonic Healthcare Limited (ASX: SHL) provides laboratory and diagnostics services. The market capitalisation of the company stood at $13.76 billion as on 24^th June 2020. Recently, the company provided a trading update to the market, wherein it stated that trading results for 8.5 months to mid-March 2020 were in-line with the earnings guidance. In addition to the recovery of base volumes/revenues, most of its businesses are integrally involved in substantial Covid-19 testing. The company’s trading results for the months of March and April 2020 were substantially below forecast, with May results stronger than expected. The below picture gives an overview of the financial performance of 1H FY20:


Key Financials (Source: Company Reports)

Secured Contract from Australian Government: In late April 2020, the company secured a contract from the Australian Government to provide a dedicated pathology service for rapid sample collection and testing for COVID-19 in residential aged care facilities.

Guidance: For FY20, the company currently anticipates reporting underlying EBITDA at a similar level of FY19. As of now, the company is unable to provide guidance for FY21 considering the current levels of uncertainty related to the pandemic.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Key Risks: SHL’s business is sensitive to change in the currency exchange rates between the Australian dollar and the currencies of its offshore operations, which have the potential to fluctuate revenue and earnings. The company is also exposed to regulatory and material risks.

Stock Recommendation: Net margin of the company stood at 7.9% in 1HFY20 as compared to the industry median of 3.0%. This implies that the company possesses decent capabilities to convert its top-line into the bottom-line against the broader industry.We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with the upside of high single-digit (in percentage terms).For the purpose, we have taken peers such as Cochlear Ltd (ASX: COH), Ramsay Health Care Ltd (ASX: RHC), Resmed Inc (ASX: RMD), etc.

Thus, considering the recent contract from the Australian Government and decent capabilities to convert its top-line into the bottom-line, we give a “Hold” recommendation on the stock at the current market price of $30.330 per share, up by 4.731% on 24^th June 2020.

Mayne Pharma Group Limited

Review Application for E4/DRSP:  Mayne Pharma Group Limited (ASX: MYX) is engaged in the development, manufacturing and marketing of branded and generic pharmaceuticals. The market capitalisation of the company stood at $621.26 million as on 24^th June 2020. Recently, the company announced that the US Food and Drug Administration has accepted the New Drug Application (NDA) for E4/DRSP, which is used to prevent pregnancy. The FDA is likely to complete its review in the 1H CY21. If E4/DRSP gets approval from the US -FDA, then it would become the first contraceptive product containing E4 and the first new estrogen introduced in the US for contraceptive use in approximately 50 years.

During 1H FY20, the company experienced a fall of 17% in its reported revenue to $227.2 million. During the period, the company filed three generic products with the FDA, including a potential first-to-market women’s health product.


Key Financials (Source: Company Reports)

Focus for Growth: The company works on a clear strategy for growth which revolves around repositioning the business into more sustainable categories and therapeutic areas like dermatology, women’s health, infectious disease and contract services. MYX would continue to tightly manage its expense base, achieve greater operating efficiencies in the manufacturing network and optimise the supply base in order to realise further cost savings.

Key Risks: The company mainly deals with in-market pricing and competitive intensity risk, which is associated with competitive dynamics for a product and entry of new competitors. It is also exposed to production cost inflation risk.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: During 1H FY20, MYX achieved positive net operating cash flow after interest, tax and working capital of $46.2 million. Current ratio of the company stood at 2.21x in 1H FY20 as compared to the industry median of 1.78x. This indicates that MYX is in a decent position to address its short-term obligations. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with the upside of low double-digit (in percentage terms).For the purpose, we have taken peers such as Oceania Healthcare Ltd (ASX: OCA), Sigma Healthcare Ltd (ASX: SIG) and Opthea Ltd (ASX: OPT).

Currently, the stock is trading slightly below the average of 52-week high and low levels of $0.645 and $0.195, respectively. Hence, considering the trading levels, decent liquidity position, positive net operating cash flows and business performance, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.390 per share, up by 5.405% on 24th June 2020.

Japara Healthcare Limited

Weakness in Aged Care Sector:Japara Healthcare Limited (ASX: JHC) owns, operates, and develops residential aged care homes. The market capitalisation of the company stood at $136.3 million as on 24^th June 2020. In a recent market update, the company stated that it continues to manage its business with high regard to COVID-19 risks with a dedicated committee actively planning and overseeing its COVID-19 response. Moreover, no resident has been tested positive for COVID-19.  As at 26^th May 2020, the company reported 4,060 occupied places. The company added that the operational conditions in the aged care sector continue to be challenging with a slight weakness in occupancy experienced from Easter onwards due to a reduction in demand, mainly from the hospital sector. The following picture gives an overview of operational metrics for 1H FY20:


Operational Metrics (Source: Company Reports)

Inclusion on Impairment Charges:During FY20, the company expects to include a non-cash impairment charge in the range of $270 million to $300 million into its financial results. This is due to a review of the carrying value of its assets in light of the impact of the COVID pandemic.

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Key Risks: JHC is exposed to a range of risks such as material business risk and interest rate risk. To manage the interest rate risk, the company may seek funding from a range of sources to diversify its funding base in the upcoming period.

Stock Recommendation: As at 30^th April 2020, the net debt of the company stood at $201 million with liquidity in the form of cash and undrawn debt of $144 million. The stock of JHC is inclined towards its 52-week low levels of $0.375, offering a decent opportunity to accumulate. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken peers like Regis Healthcare Ltd (ASX: REG), Estia Health Ltd (ASX: EHE), Virtus Health Ltd (ASX: VRT). Thus, considering the cash and debt position and current market scenario, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.530 per share up by 3.922% on 24^th June 2020.

Sigma Healthcare Limited

Agreement with Government:Sigma Healthcare Limited (ASX: SIG) is one of the leading full-line pharmacy wholesalers in Australia. The market capitalisation of the company stood at $635.61 million as on 24^th June 2020. Recently, the company advised the market that it has inked an agreement with the Government and the Department of Health in relation to the industry funding for the distribution of Pharmaceutical Benefits Scheme (PBS) medicines for the next five years. During FY20, reported EBITDA of the company stood at $24.2 million, which was mainly impacted by one-off costs of transforming the business. During the year, the company has onboarded new customers who represented more than $180 million of annualised sales, with minimal customer losses. The company has diversified sales growth coming from individual and small groups choosing to partner with Sigma.


Reported EBITDA (Source: Company Reports)

Strong Growth in the Year Ahead: For FY21, the company anticipates strong growth which has been initially boosted by abnormally high demand flowing from the COVID-19 pandemic. The underlying business of the company continues to have a positive growth outlook.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Key Risks: Sigma Healthcare Limited is exposed to numerous risks such as financial risk, operational risk and liquidity risk. Financial risk arises from the customer defaults, loss of inventory from damage or obsolescence, loss of material customers and general retail trading conditions. To mitigate this, the company has exercised a structured process to review funding and debt needs.

Stock Recommendation: The company closed FY20 with a net debt balance of $146 million, reflecting a marginal rise over the forecast. This was mainly due to increased working capital commitment relating to the positive but unexpected return of the FMCG supply contract for CW.We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with the upside of high single-digit (in percentage terms).For the purpose, we have taken peers such as Healius Ltd (ASX: HLS), Ecofibre Ltd (ASX: EOF) and Mayne Pharma Group Ltd (ASX: MYX).

Thus, considering the recent agreement with Government, expected growth in FY21, and rise in debt levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.605 per share, up by 0.833% on 24^th June 2020.

Comparative Price Chart(Source: Refinitiv, Thomson Reuters)

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