Poor first-quarter sales in UDG’s (UDG) Sharp packaging business forced management to trim the division’s guidance for the year to September 2018 to mid-single-digit revenue growth. The announcement sent the share price down more than 5 per cent on results day. Now investors face a question: is that share price fall a) a long overdue response to UDG’s exorbitant valuation or b) an over-reaction to a trading blip and therefore a buying opportunity?
Numis picks option (a). The broker is concerned that UDG has become too reliant on bolt-on acquisitions that offer few material synergies with the wider business. Indeed, on an underlying basis, operating profits fell in both of the two operating segments, while acquisition costs meant net debt rocketed up to $47m (from a net cash position in March 2017).
But Peel Hunt thinks UDG is deserving of its premium valuation thanks to its ability to improve the quality of earnings via strategic M&A. According to outgoing chief financial officer Alan Ralph, the acquisition strategy will boost margins in the long term by increasing cross-selling opportunities throughout the group. The addition of pharma communications businesses in 2017 boosted IFRS adjusted pre-tax profits by 19 per cent to $63m (£47m).
| UDG HEALTHCARE (UDG) | ||||
| ORD PRICE: | 881p | MARKET VALUE: | £2.19bn | |
| TOUCH: | 880-882p | 12-MONTH HIGH / LOW: | 963p | 740p |
| DIVIDEND YIELD: | 1.2% | PE RATIO: | 70 | |
| NET ASSET VALUE: | 308ȼ* | NET DEBT: | 5% | |
| Half-year to 31 Mar | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
| 2017 | 579 | 40.9 | 12.5 | 3.58 |
| 2018 | 675 | 1.75 | 0.44 | 4.25 |
| % change | +17 | -96 | -96 | +19 |
| Ex-div: | 31 May | |||
| Payment: | 28 Jun | |||
| *Includes intangible assets of $727m, or 293ȼ a share £1=$1.35 | ||||
